Cogeco 2015 Annual Report Download - page 31

30 COGECO CABLE INC. 2015 MD&A
Atlantic Broadband
On June 20, 2015, following the announcement of an agreement to acquire MetroCast Connecticut, Moody’s Investors Service (“Moody’s”)
affirmed their ratings on Atlantic Broadband’s credit facilities at "Ba3", one notch above the "B1" corporate family rating. Obligations rated Ba
are judged to be speculative and are subject to substantial credit risk. Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
On June 17, 2015, following the announcement of an agreement to acquire MetroCast Connecticut, S&P confirmed their ratings on Atlantic
Broadband’s credit facilities to "BB", one notch above the "BB-" Issuer Rating.
7.5 FINANCIAL MANAGEMENT
The Corporation is exposed to interest rate risks for both fixed and floating interest rate instruments. Interest rates fluctuations will have an effect
on the valuation and collection or repayment of these instruments. At August 31, 2015, all of the Corporation’s long-term debt was at fixed rate,
except for the Corporation’s Term Revolving Facility and First Lien Credit Facilities. The sensitivity of the Corporation’s annual financial expense
to a variation of 1% in the interest rate applicable to these facilities is approximately $9.0 million based on the outstanding debt at August 31,
2015.
The Corporation is exposed to foreign exchange risk related to its long-term debt denominated in US dollars that is not designated as a hedge
on its US dollar net investments. In order to mitigate this risk, the Corporation has established guidelines whereby cross-currency swap agreements
can be used to fix the exchange rates applicable to its US dollar denominated long-term debt. All such agreements are exclusively used for
hedging purposes. Accordingly, on October 2, 2008, the Corporation entered into cross-currency swap agreements to set the liability for interest
and principal payments on its Senior Secured Notes Series A.
The following table shows the cross-currency swaps outstanding at August 31, 2015:
Type of hedge Notional amount Receive interest rate Pay interest rate Maturity Exchange rate Hedged item
Cash flow US$190 million 7.00% USD 7.24% CAD October 1, 2015 1.0625 US$190 million Senior
Secured Notes Series A
The Corporation is also exposed to foreign exchange risk with respect to the interest associated with its long-term debt denominated in US dollars
and British Pounds. The impact of a 10% change in the exchange rate of the US dollar and British Pound into Canadian dollars would change
financial expense by approximately $7.7 million based on the outstanding debt at August 31, 2015.
The Corporation is also exposed to foreign exchange risk related to its forecasted purchase commitments of property, plant and equipment
denominated in US dollars. In order to mitigate such risk, the Corporation has entered into foreign currency forward contracts during the third
quarter of fiscal 2015 and designated them as cash-flow hedges for accounting purposes.
The following table shows the forward contracts outstanding at August 31, 2015:
Type of hedge Notional amount Maturity Exchange rate Hedged item
Cash flow US$2.4 million September 2015 1.22204 Purchase commitments of property, plant and
equipment
Furthermore, the Corporation’s investments in foreign operations is exposed to market risk attributable to fluctuations in foreign currency exchange
rates, primarily changes in the values of the Canadian dollar versus the US dollar and British Pound. This risk is mitigated since the major part
of the purchase prices for Atlantic Broadband and Peer 1 Hosting were borrowed directly in US dollars and British Pounds.
The following table shows the investments in foreign operations outstanding at August 31, 2015:
Type of hedge Notional amount of debt Aggregate investments Hedged item
Net investment US$860.5 million US$1.1 billion Net investment in foreign operations in US dollar
Net investment £54 million £58.1 million Net investment in foreign operations in British pound
The exchange rates used to convert the US dollar currency and British Pound currency into Canadian dollar for the statement of financial position
accounts at August 31, 2015 was $1.3157 ($1.0873 in 2014) per US dollar and $2.0189 ($1.8052 in 2014) per British Pound. A 10% change in
the exchange rates of the US dollar and British Pound into Canadian dollars would change other comprehensive income by approximately $30.9
million.