Cogeco 2008 Annual Report Download - page 29

28 COGECO CABLE INC. 2008 Management’s Discussion and Analysis
On October 1, 2008, the Corporation completed, pursuant to a private placement, the issuance of US$190 million Senior Secured
Notes Series A maturing October 1, 2015, and $55 million Senior Secured Notes Series B maturing October 1, 2018. The Senior
Secured Notes Series B bear interest at the coupon rate of 7.60% per annum, payable semi-annually. In addition, the Corporation
entered into cross-currency swap agreements to fix the liability for interest and principal payments on the Senior Secured Notes
Series A, which bear interest at the coupon rate of 7.00% per annum, payable semi-annually. Taking into account these
agreements, the effective interest rate of the Senior Secured Notes Series A is 7.24% and the exchange rate applicable to the
principal portion of the US dollar-denominated debt has been fixed at $1.0625. The net proceeds of $255 million will be used to
repay the US$150 million Senior Secured Notes Series A maturing on October 31, 2008, including the related derivative financial
instruments, for a total of $238.7 million and to reduce existing Indebtedness.
As at August 31, 2008, the Corporation had a working capital deficiency of $607.8 million compared to $120.7 million as at
August 31, 2007. The increased deficiency is mainly attributable to the principal repayments on the long-term debt due within the
next fiscal year if $413.1 million as described below. As part of the usual conduct of its business, Cogeco Cable maintains a working
capital deficiency due to a low level of accounts receivable as the majority of the Corporation’s customers pay before their services
are rendered, unlike accounts payable and accrued liabilities, which are paid after products are delivered or services are rendered,
thus enabling the Corporation to use cash and cash equivalents to reduce Indebtedness.
During the next five years, the required principal repayments on Cogeco Cable’s long-term debt, excluding those under capital
leases, will amount to $1,028.6 million. The US$150 million Senior Secured Notes Series A and the related derivative financial
instruments for a total of $238.7 million, the $150 million Senior Secured Debentures Series 1 and the €15.7 million ($24.4 million)
portion of the third tranche of the Term Facility will have to be repaid in fiscal 2009 for a total amount of $413.1 million. The
€26.1 million ($40.7 million) portion of the third tranche of the Term Facility will have to be repaid in fiscal 2010. The remaining
portion of the Term Facility drawn for an amount of $399.8 million will have to be repaid in fiscal 2011. Finally, Cogeco Cable’s
Senior Secured Notes Series B of $175 million will have to be repaid in fiscal 2012. Based on the availability of $417.4 million as at
August 31, 2008 under its committed Term Facility, the anticipated free cash flow of $90 million for fiscal 2009 as well as the private
placement concluded on October 1, 2008 for net proceeds of $255 million discussed above, the Corporation has the ability to
manage its long-term debt maturities until the expiry of its Term Facility. In the years to come, management expects to use most of
its annual free cash flows to reduce Indebtedness. Management believes that the committed Term Facility will provide sufficient
liquidity to manage the maturities of its long-term debt and support working capital requirements and that the next key refinancing
milestone is related to the maturity of its Term Facility in July 2011. Refer to page 17 of this MD&A for a detailed description of
financial risks.
In fiscal 2008, Fitch Ratings (“Fitch”) initiated rating coverage on Cogeco Cable. Fitch assigned a rating of BBB- for the Senior
Secured Debentures and Notes. In fiscal 2007, Dominion Bond Rating Service (“DBRS”) and Standard & Poor’s Ratings Services
(“S&P”) upgraded Cogeco Cable’s ratings. DBRS upgraded the rating of the Senior Secured Debentures and Notes to a BBB (low)
from a BB (high) rating based on the lower leverage as a result of the issue of 8,000,000 subordinate voting shares to reduce
Indebtedness. S&P also upgraded the Senior Secured Debentures and Notes to a BBB- (positive outlook) from a BB+ rating due to
the issue of 8,000,000 subordinate voting shares to reduce Indebtedness.
FOREIGN EXCHANGE MANAGEMENT
The Corporation has established guidelines whereby currency swap agreements can be used to manage risks associated with
fluctuations in exchange rates related to its US dollar denominated long-term debt. All such agreements 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 its own credit rating.
Cogeco Cable has entered into cross-currency swap agreements to set 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 $1.5910. Amounts due under the US$150 million Senior Secured Notes increased by $0.9 million at
August 31, 2008 compared to August 31, 2007 due to the Canadian dollar’s depreciation. The fair value of cross-currency swap
agreements decreased by a net amount of $3.7 million, of which $0.9 million offsets the foreign exchange loss on the US-
denominated debt. The difference of $2.8 million was recorded as an increase to other comprehensive income, net of income taxes
of $0.9 million. Cogeco Cable has also entered into cross-currency swap agreements to set the liability for interest and principal on
its new US$190 million financing completed on October 1, 2008 as previously discussed.
Furthermore, the Corporation’s net investment in self-sustaining foreign subsidiaries is exposed to market risk attributable to
fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. This risk is
mitigated since the major part of the purchase price for Cabovisão was borrowed directly in Euros. This debt is designated as a
hedge of a net investment in self-sustaining foreign subsidiaries and, accordingly, the Corporation realized a foreign exchange gain
of $18.8 million in fiscal 2008, which is deferred and recorded in the consolidated statement of comprehensive income. The