Cogeco 2010 Annual Report Download - page 31

30 COGECO CABLE INC. 2010 Management’s Discussion and Analysis (MD&A)
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.
As at August 31, 2010, the Corporation had a working capital deficiency of $195.5 million compared to $240.9 million as at August 31, 2009.
The decreased deficiency is mainly attributable to the repayment of the Term Facility through the issuance of a new Term Revolving Facility. 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 $596.6 million. Cogeco Cable’s Senior Secured Notes Series B of $175 million will have to be repaid in fiscal 2012. In addition,
Cogeco Cable’s Senior Secured Debentures Series 1 for $300 million and the amount €90 million ($121.6 million) drawn on the Term Revolving
Facility will mature in 2014. Based on the availability of $620.4 million as at August 31, 2010 under its committed Term Revolving Facility, and
the anticipated free cash flow of $55 million for fiscal 2011, the Corporation has the ability to manage its long-term debt maturities until the
expiry of its Term Revolving 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 Revolving Facility will provide sufficient liquidity to manage
the maturities of its long-term debt and satisfy working capital requirements and that the next key refinancing milestone is related to the maturity
of its Term Revolving Facility in July 2014. Refer to page 20 for a detailed description of financial risks.
On October 6, 2010, Dominion Bond Rating Service (“DBRS”) confirmed their rating on the Senior Secured Debentures and Notes to BBB
(low). Obligations rated in the “BBB” category are in the fourth highest category and are regarded as of adequate credit quality, where the
degree of protection afforded interest and principal is considered acceptable, but the entity is fairly susceptible to adverse changes in financial
and economic conditions, or there may be other adverse conditions present which reduce the strength of the entity and its rated securities.
On October 1, 2010, Fitch Ratings (“Fitch”) upgraded the Issuer Default Rating (“IDR”) of Cogeco Cable to BBB- from BB+ and confirmed their
rating on the Senior Secured Debentures and Notes to BBB-, one notch above the corporate credit ratings of BB+. Obligations rated in the
“BBB” category are regarded as of good credit quality, where the capacity for payment of financial commitments is considered adequate but
adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade
category.
On June 24, 2010, Standard & Poor’s Ratings Services (“S&P”) maintained their rating on the Senior Secured Debentures and Notes of the
Corporation to BBB–, two notches above the corporate credit ratings of BB to reflect very high recovery prospects of first lien secured issues.
Obligations rated in the “BBB” category are in the fourth highest category and are regarded as investment-grade. Such obligations show
adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation. The ratings may be modified by the addition of a plus (+) or minus (–)
sign to show relative standing within the major rating categories. S&P has assigned a recovery rating of “1” to Cogeco Cable’s credit facility and
other senior secured first-priority debt. The “1” recovery rating indicates expectations of very high recovery (90%-100%) of principal in the event
of payment default.
The table below shows Cogeco Cable’s credit ratings:
A
s at August 31, 2010 DBRS Fitch S&P
Senior secured notes and debentures BBB (low) BBB– BBB–
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 a portion
of the Euro-denominated loans outstanding under the Term Revolving Facility, and previously the Term Facility, for a notional amount of
€111.5 million, which has been reduced to €95.8 million on July 28, 2009, and to €69.6 million on July 28, 2010. The interest rate swap to
hedge these loans has been fixed at 2.08% until the maturity of the swap agreement on July 28, 2011. In addition to the interest rate swap of
2.08%, Cogeco Cable will continue to pay the applicable margin on these loans in accordance with its Term Revolving Facility. In fiscal 2010,
the fair value of interest rate swap increased by $1 million, which is recorded as an increase of other comprehensive income, net of income
taxes, compared to a decrease of $2.2 million which was recorded as a decrease of other comprehensive income, net of income taxes, in the
prior year.