Cogeco 2009 Annual Report Download - page 34

Management’s discussion and analysis COGECO CABLE INC. 2009 33
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 were 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.
On June 9, 2009, the Corporation completed, pursuant to a public debt offering, the issue of $300 million Senior Secured
Debentures Series 1. These debentures mature on June 9, 2014 and bear interest at 5.95% per annum, payable semi-annually.
These debentures are indirectly secured by a first priority fixed and floating charge and a security interest on substantially all present
and future real and personal property and undertaking of every nature and kind of the Corporation and certain of its subsidiaries.
The net proceeds of sale of the Debentures were used to reimburse Cogeco Cable’s existing Indebtedness and for general
corporate purposes.
On March 5, 2008, the Corporation issued a $100 million Senior Unsecured Debenture by way of private placement, subject to usual
market conditions. As previously discussed, the proceeds of this issuance were primarily used to finance the recent acquisitions.
As at August 31, 2009, the Corporation had a working capital deficiency of $240.9 million compared to $607.8 million as at
August 31, 2008. The decreased deficiency is mainly attributable to the repayments of US$150 million Senior Secured Notes
Series A and the related derivative financial instrument, both maturing on October 31, 2008, and of $150 million Senior Secured
Debentures Series 1 at maturity on June 4, 2009 through the issuance of new debt. 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 $688.1 million. The €26.1 million ($41 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 currently drawn for an amount of $172.1 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,
and the Senior Secured Debentures Series 1 for $300 million will mature in 2014. Based on the availability of $643.5 million as at
August 31, 2009 under its committed Term Facility, the anticipated free cash flow of $125 million for fiscal 2010 as well as the
private placement concluded on October 1, 2008 for net proceeds of $255 million and the public debt offering of Senior Secured
Debentures Series 1 for $300 million completed on June 9, 2009, both described 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 after dividend payments 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 22 for a detailed description of
financial risks.
On April 9, 2009, Standard & Poor’s Ratings Services (“S&P”) revised Cogeco Cable’s outlook to “stable” from “positive”. 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.
FINANCIAL MANAGEMENT
The Corporation has established guidelines whereby swap agreements can be used to manage risks associated with fluctuations in
interest and foreign currency exchange rates related to its 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 a swap agreement with a financial institution to fix the floating benchmark interest rate with respect
to the Euro-denominated Term Loan facilities for a notional amount of €111.5 million. The interest rate swap to hedge the Term
Loans has been fixed at 2.08% until their maturity at July 28, 2011. The notional value of the swap will decrease in line with the
amortization schedule of the Term Loans, and stands at €95.8 million at August 31, 2009. In addition to the interest rate swap of
2.08%, Cogeco Cable will continue to pay the applicable margin on these Term Loans in accordance with its Term Facility. Since the
issuance on January 21, 2009, the fair value of interest rate swap decreased by $2.2 million, which is recorded as a decrease of
other comprehensive income net of income taxes of $0.6 million.