DBRS Confirms Corus Entertainment Inc. at BB with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of Corus Entertainment Inc. (Corus or the Company) at BB with a Stable trend. The rating confirmation reflects both the intensifying competitive pressures in the industry and the better-than-expected television (TV) advertising revenue performance and balance sheet deleveraging year-to-date (YTD) Q3 F2019. The BB rating continues to reflect Corus’s stable market position in its TV business, strong cash-generating capacity and continued commitment to deleveraging. The rating also continues to consider the structural shift in advertising spending (ad spend) to digital and online channels from traditional media, the persistent annual cord-cutting and/or shaving by Canadian households and, to a lesser degree, the uncertainty associated with the Canadian Radio-television and Telecommunications Commission cable regulatory changes.

A recovery in TV advertising revenue has been the primary driver of better-than-anticipated consolidated top-line revenue YTD Q3 F2019, more than overcoming softness in subscriber and radio revenue performance. The EBITDA margin has declined very modestly year over year (YOY), as Corus continues to execute on cost-saving initiatives and streamlined business operations amid a backdrop of YOY increase in employee costs arising from the improved YTD performance. YTD revenue and EBITDA performance are trending above DBRS’s initial F2019 expectations.

Stronger-than-expected operating performance YTD, combined with the introduction of a more conservative capital allocation that favours debt repayment over dividends, has resulted in a meaningful decline in leverage through the first three quarters of F2019.

While YTD results have been very encouraging, DBRS does not anticipate the pace of revenue growth witnessed YTD through Q3 F2019 to continue in the F2020-2022 timeframe. Revenue is forecast to be flat to slightly positive over DBRS’s forecast horizon, as the Company faces tough annual comparables in F2020, a steadily intensifying competitive environment and continued pressure from cord shaving and/or cutting, offset by a focus on continued advertising yield improvement in TV and revenue diversification initiatives. The EBITDA margin is expected to be roughly 34% in F2019 but to decline YOY in F2020, primarily reflecting increased investments in new revenue and efficiency initiatives and programming expenses, including Canadian content spending in accordance with regulatory obligations. DBRS expects EBITDA margins to be flat to up modestly in F2021-F2022 as the Company continues to execute on cost-saving initiatives and streamlining of internal processes.

While Corus’s financial leverage has improved meaningfully as a result of a combination of EBITDA growth and debt repayment through the first nine months of F2019, DBRS believes a positive rating action is unlikely in the foreseeable future due to an intensifying competitive landscape from traditional media, social networking and the rapid emergence of numerous unregulated digital offerings. A negative rating action is also unlikely in the foreseeable future unless operating performance begins to deteriorate and/or financial management becomes more aggressive such that leverage moves toward 4.0 times on a sustained basis.

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

The principal methodology is Rating Companies in Broadcast Industry, which can be found on dbrs.com under Methodologies & Criteria.

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@dbrs.com.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada