Cogeco 2012 Annual Report Download - page 29

28 COGECO CABLE INC. 2012 Management’s Discussion and Analysis (MD&A)
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.
On July 18, 2012, following the announcement of the Atlantic acquisition, Fitch Ratings (“Fitch”) has placed under Rating Watch Negative the
Issuer Default Rating (IDR) of Cogeco Cable at “BBB-” and their rating on the Senior Secured Debentures and Notes at “BBB-”. The rating
action reflects Fitch’s need to assess the effect of the acquisition transaction on Cogeco Cable’s credit profile. Fitch believes, pending final
review of the transaction once it closes, that a downgrade, if necessary would be limited to one notch. 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.
The table below shows Cogeco Cable’s credit ratings:
A
t August 31, 2012 DBRS Fitch S&P
Senior secured notes and debentures BBB (low) BBB– BBB
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating
organization.
FINANCIAL MANAGEMENT
The Corporation has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million
Senior Secured Notes Series A maturing on October 1, 2015. These agreements have the effect of converting the U.S. interest coupon rate of
7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the
debt has been fixed at $1.0625 per US dollar. During fiscal 2012, amounts due under the US$190 million Senior Secured Notes Series A
increased by $1.2 million due to the US dollar’s appreciation relative to the Canadian dollar. The fair value of cross-currency swaps liability
decreased by a net amount of $2.7 million, of which a decrease of $1.2 million offsets the foreign exchange loss on the debt denominated in
US dollars. The difference of $1.5 million was recorded as an increase of other comprehensive income. During fiscal 2011, amounts due under
the US$190 million Senior Secured Notes Series A decreased by $16.5 million due to the US dollar’s depreciation over the Canadian dollar.
The fair value of cross-currency swaps and interest rate swap liabilities increased by a net amount of $18.3 million, of which $16.5 million
offsets the foreign exchange gain on the debt denominated in US dollars. The difference of $1.8 million was recorded as a decrease of other
comprehensive income.
The Corporation is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian
dollar with regards to purchases of certain equipment, as the majority of customer premise equipment is purchased and subsequently paid in
US dollars. Please consult the “Foreign Exchange Risk” section in Note 20 of the consolidated financial statements for further details.
COMMITMENTS AND GUARANTEES
Cogeco Cable’s contractual obligations at August 31, 2012 are shown in the table below:
Years ended August 31, 2013 2014 2015 2016 2017 Thereafte
r
Total
(in thousands of dollars) $ $ $ $ $ $ $
Long-term debt(1) 
300,000  187,283  555,000 1,042,283
Balance due on a business acquisition 11,400      11,400
Derivatives financial instruments    14,592   14,592
Finance leases(2) 862 7     869
Operating lease agreements and other
long-term contracts(3) 28,189 20,624 19,844 19,678 17,722 42,940 148,997
Pension plan liabilities and accrued
employees benefits (4) 
     12,454
Total contractual obligations(5) 40,451 320,631 19,844 221,553 17,722 597,940 1,230,595
(1) Includes principal and excludes finance leases.
(2) Includes interest.
(3) The Corporation’s significant operating lease agreements are for rent premises and support structures. The Corporation also entered into long-term
commitments with suppliers to provide services that include minimum spend commitments.
(4) The nature of those obligations prevents the Corporation from estimating an annual breakdown.
(5) Annual breakdown excludes pension plan liabilities and accrued employees benefits.