Cogeco 2009 Annual Report Download - page 23

22 COGECO CABLE INC. 2009 Management’s discussion and analysis
systems, or against losses resulting from natural disasters affecting the network. In Canada, it relies on data protection and recovery
systems that it has put in place with third-party service providers. In Portugal, similar arrangements with third parties have not been
implemented as yet. The Corporation is still working on a more complete and up-to-date business continuity plan, and tests on the
implementation of this plan have not taken place as yet.
FINANCIAL RISKS
Cable telecommunications is a very capital-intensive business that requires substantial and recurring investment in property, plant,
equipment and customer acquisition. Cogeco Cable depends on capital markets for the availability of additional capital that it must
deploy to support its internal and external growth. There is no assurance that future capital requirements will be met when needed,
or that the cost to secure such needed incremental capital will not increase the Corporation’s weighted average cost of capital. The
Corporation entered into cross-currency and interest rate swap agreements to fix the liability for interest and principal payments on
its certain of its long-term debts. However, the global financial markets crisis and the ensuing global economic slowdown may
extend further and constrain the Corporation’s ability to meet its future financing requirements, both internal and external, increase
its weighted average cost of capital and cause other cost increases from counterparties also faced with liquidity problems and higher
cost of capital.
Cogeco Cable’s debt financing structure involves the borrowing of money from third parties by Cogeco Cable and the subsequent
investment of equity and debt by the Corporation into its direct and indirect subsidiaries. This financing structure requires that
Cogeco Cable be able to receive upstream flows of funds from its subsidiaries through capital repayments, interest payments,
dividend payments, management fees or other distributions that are sufficient to meet its corporate debt obligations. Future changes
to corporate tax, currency exchange and other legal requirements applicable to the Corporation, or to its direct or indirect
subsidiaries could adversely affect such upstream flows of funds or the effectiveness of the Corporation’s existing debt financing
structure.
The Corporation’s leverage and corporate risk profile is liable to vary from time to time as a result of new developments in its
business activities and the investments required to support internal growth as well as external growth through acquisitions. More
particularly, leverage may fluctuate as the Corporation completes further business acquisitions domestically or abroad, and the risk
profile may differ from one acquisition to the other depending on the characteristics of the acquired business and its relevant market.
The development of new services or additional lines of business, and the acquisition of new business properties, may not
necessarily generate the anticipated results or benefits. There is no assurance that Cogeco Cable will be able to maintain or
increase distributions to shareholders by way of dividends or otherwise.
The acquisition of Cabovisão has been financed through corporate credit facilities of Cogeco Cable. The major part of the purchase
price for the shares of Cabovisão (approximately €461.8 million) was borrowed directly in Euros and a second tranche of
$150 million was initially borrowed in Canadian dollars and subsequently drawn in Euros (€104.6 million). There are no financial
hedging arrangements in effect at this time for currency fluctuation risk on interest payments resulting from these borrowings.
However, in fiscal 2009, there was a partially offsetting relationship between the borrowings in Euros and the inter-corporate debt
interest payments and cash distributions in Euros originating from the European subsidiaries. Also, for the purposes of this
acquisition, Cogeco Cable has set up an acquisition structure involving one of its operating Canadian subsidiaries and intermediate
holding and financing entities located in Luxembourg with a view of maximizing returns. From time to time, the Corporation
considers various options to extend the term loan with alternate sources of Euro-denominated financing.
The Corporation is exposed to interest rate risks for both fixed interest rate and floating interest rate instruments. Fluctuations in
interest rates will have an effect on the valuation and the collection or repayment of these instruments which could result in a
significant impact on the Corporation’s financial expense. At August 31, 2009, over 90% of Cogeco Cable’s debt is at fixed interest
rates.
The current volatility of currency exchange and interest rates in the financial markets is unusually high and could lead to an increase
in the level of risk on hedging instruments to which Cogeco Cable is a party, should one or more of the counterparties to these
instruments become financially distressed and unable to meet their obligations.
Market conditions may also have an impact on the Corporation’s defined benefit pension plans as there is no assurance that the
actual rate of return on plan assets will approximate the assumed rate of return used in the most recent actuarial valuation. Market
driven changes may impact the assumptions used in future actuarial valuations and could result in the Corporation being required to
make contributions in the future that differ significantly from the current contributions to the Corporation’s defined benefit pension
plans.