DBRS Morningstar Confirms Cogeco Communications Inc.’s Ratings

DBRS Limited (DBRS Morningstar) confirmed Cogeco Communications Inc.’s (Cogeco or the Company) Issuer Rating at BB (high) and its Senior Secured Notes & Debentures rating at BBB (low) with a recovery rating of RR1. All trends are Stable. The confirmations acknowledge Cogeco's currently higher leverage post the Ohio broadband systems acquisition (which closed on September 1, 2021) and stronger-than-expected F2021 earning results. The Stable trends consider Cogeco’s opportunity to launch a wireless service in the Canadian marketplace, while still delivering modest deleveraging through our forecast horizon. The ratings consider the Company’s established footprint in existing markets, the growth potential of the U.S. broadband segment (Atlantic Broadband or ABB), and Cogeco’s potential entry into the Canadian mobile market, while reflecting intensifying competition, risks associated with technological and regulatory changes, and the resources required to develop a successful wireless offering.

Cogeco’s earnings profile through F2021 remained stable as consolidated revenue and earnings performed slightly better than expected, reflecting solid constant currency revenue and EBITDA growth at ABB, and high-single-digit acquisition driven revenue and EBITDA growth at Cogeco Connexion. In terms of the financial profile, Cogeco's credit metrics were also modestly better than forecast and were roughly in line with the prior year and supportive of the current ratings.

While an official decision to launch a wireless offering in Canada remains subject to network access and rate negotiations with incumbents, as a key beneficiary of the CRTC's limited MVNO wireless industry ruling and having committed to investing ~$337 million in spectrum licenses, Cogeco is highly motivated to launch a wireless offering. DBRS Morningstar believes Cogeco’s earnings profile has the potential to benefit from the Company’s opportunity to enter the Canadian mobile market in the long term; however short- to medium-term execution risks exist.

In F2022, acquisition activity is expected to drive material revenue growth at ABB and be a major contributor to consolidated growth of ~16% year over year (YOY). In F2023-F2025, revenue is forecast to increase in the mid-single digit range driven by a continued increase in high speed broadband access footprint, higher Internet speed availability and a potential wireless offering launch in the Canadian market in F2023. EBITDA margins are expected to compress modestly YOY in F2022 related to acquisition integration and then increase slowly as the Company expands its service offering including a potential wireless offering in Canada.

DBRS Morningstar expects Cogeco’s financial profile to remain supportive of the current ratings despite an increase in gross leverage related to ABB’s acquisition of the Ohio broadband system acquisition (which closed on September 1, 2021) and the anticipation of a “capital light” mobile investment strategy in Canada.

Should wireline operating metrics deteriorate materially, wireless not gain sufficient traction in the marketplace, and/or leverage move structurally higher toward 3.5 times (x) to 4.0x, DBRS Morningstar may take a negative rating action on Cogeco’s Issuer Rating. Conversely, if operating performance reflects the successful expansion of Cogeco's service offering and the Company is able to deleverage in a manner that sustains “core” or non-acquisition-driven leverage at 3.0x or below, DBRS Morningstar may take a positive rating action on Cogeco’s Issuer Rating.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

DBRS Morningstar notes that this press release was amended on January 31, 2022, to include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support methodology and link.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Communications Industry (July 27, 2021; https://www.dbrsmorningstar.com/research/382119), DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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