Cogeco 2003 Annual Report Download - page 20

-$100
-$50
$0
$50
Increasing Free Cash Flow
(in millions of dollars)
2000 2001 2002 2004
Guideline
2003
MANAGEMENT’S DISCUSSION AND ANALYSIS
Fiscal 2003 leverage and interest coverage ratios
improvement should continue in fiscal 2004 as management
expects further Operating Income growth and debt reductions.
See “Fiscal 2004 Financial Guidelines” for further details.
Financing
The Corporation benefits from a $400 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. As at August 31, 2003, the Corporation
utilized $110 million of its Term Facility. Cogeco Cable is on
schedule with financial expense payments, principal repayments
on its borrowing, and continues to satisfy the various conditions
stipulated in its financing agreements.
Of all Cogeco Cable’s debt instruments, the bank facilities
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 $239 million. $15 million
and $95 million are for the repayment of the Term Facility
in fiscal 2006 and 2007, respectively. The $125 million
Second Secured Debentures will mature in fiscal 2007.
In November 2002, Dominion Bond Rating Service
revised its rating on the Senior Secured Debentures and the
Second Secured Debentures downward from BBB(low) and
BB(high) to BB(high) and BB, respectively. In February
2003, Standard & Poor’s Ratings Services also revised
its rating on the Senior Secured Debentures and Notes and
the Second Secured Debentures downward from BBB and BBB-
negative outlook to BBB- and BB+ stable outlook, respectively.
The revised ratings should not have an impact on financial
expense. With anticipated strong 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 2004, refinancings to fund internal growth are
not expected before fiscal 2007. The revised ratings could lead
to increased borrowing costs, only if Cogeco Cable had to access
the debt markets to finance an unexpected large acquisition
or contingency.
Foreign Exchange Management
The Corporation has established guidelines whereby
currency swap agreements and foreign exchange forward
contracts are used to manage risks associated with fluctuations
in exchange rates related to its US dollars 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
acredit 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.
18 Cogeco Cable Inc. 2003
Fiscal 2003 leverage and interest
coverage ratios improvement
should continue in fiscal 2004
as management expects further
Operating Income growth
and debt reductions.