Cogeco 2004 Annual Report Download - page 23

MANAGEMENT’S DISCUSSION AND ANALYSIS
Cogeco Cable Inc. 2004 21
Financing
The Corporation benefits from a $270 million Term Facility and
a$25 million operating line of credit with a group of financial
institutions. These bank facilities are not guaranteed by the
parent company, COGECO Inc. At the request of Cogeco Cable,
and in light of the reduction of Indebtedness resulting from Free
Cash Flow, the total commitment under the Term Facility was
reduced from $400 million to $270 million in January 2004. As at
August 31, 2004, the Corporation utilized $58 million of its Term
Facility. Cogeco Cable could have used all the committed amount
of its Term Facility without breaching any of its covenants under
its financing agreements.
Cogeco Cable continues to satisfy the various conditions stipulated
in its financing agreements whilst being on schedule to meet
interest and principal repayment obligations. Of all Cogeco Cable’s
debt instruments, the bank facilities usually set the most restrictive
limitations on the Corporation’s activities and operations. The most
important restrictions cover maintaining certain financial ratios,
authorised investments, disposal of assets, reimbursement of
long-term debt and distributions to shareholders.
During the next five years, Cogeco Cable’s required principal
repayments on its long-term debt, excluding those under capital
leases, amount to $574.6 million. The amount used under the Term
Facility and the $125 million Second Secured Debentures will have
to be repaid in fiscal 2007. The $150 million Senior Secured Deben-
tures and the US$150 million Senior Secured Notes will have to
be repaid in fiscal 2009 for a total amount of CDN$388.7 million
(the Senior Secured Notes are converted into CDN$ using the
exchange rate on the cross-currency swap agreements).
WITH EXPECTED FREE CASH FLOW OF $45 MILLION TO
$50 MILLION IN FISCAL 2005, COGECO CABLE IS WELL
POSITIONED TO REDUCE FINANCIAL LEVERAGE.
In fiscal 2004, Dominion Bond Rating Service (DBRS) and
Standard & Poor’s Ratings Services (S&P) have both confirmed
their stable outlook on Cogeco Cable’s ratings. DBRS rates the
Senior Secured Debentures and Notes and the Second Secured
Debentures BB(high) and BB, respectively. S&P rates the Senior
Secured Debentures and Notes and the Second Secured Deben-
tures one notch higher than DBRS at BBB- and BB+, respectively.
With continued growth in Free Cash Flow, Cogeco Cable is well
positioned to reduce its financial leverage, which should improve
its debt ratings. Based on anticipated Free Cash Flow for fiscal
2005, refinancings to fund internal growth are not expected
before fiscal 2007.
Foreign Exchange Management
The Corporation has established guidelines whereby currency
swap agreements and foreign exchange forward contracts can be
used to manage risks associated with fluctuations in exchange
rates related to its US-dollar denominated long-term debt and its
purchases of programming content and home terminal equipment
denominated in US dollars. All such agreements and contracts are
exclusively used for hedging purposes. In order to minimize the
risk of counter-party default, Cogeco Cable completes transactions
with financial institutions that carry a credit rating equal or
superior to A+.
Cogeco Cable has entered into cross-currency swap agreements
to fix the liability for interest and principal payments on its
US$150 million Senior Secured Notes. These agreements have
the effect of converting the US interest coupon rate of 6.83% per
annum to an average Canadian dollar fixed interest rate of 7.254%
per annum. The exchange rate applicable to the principal portion
of the debt has been fixed at CDN$1.5910. Amounts due under
the US$150 million Senior Secured Notes Series A declined by
CDN$10.9 million in fiscal 2004 due to the strengthening of the
Canadian dollar. Since the Senior Secured Notes Series A are fully
hedged, the decline is fully offset by an increase in deferred credit
described in Note 8 on page 38. This $41.7 million deferred credit
represents the difference between the year-end exchange rate
and the exchange rate on the cross-currency swap agreements,
which determines the liability for interest and principal payments
on the Senior Secured Notes Series A.
In June 2003, Cogeco Cable entered into foreign exchange forward
contracts to hedge a portion of anticipated purchases in US
dollars for fiscal 2003 and 2004. At August 31, 2004, no forward
contracts were outstanding.