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Videotron Ltee's Proposed C$400 Million And US$500 Million Unsecured Debt Rated ‘BB+’ (Recovery Rating: ‘3’)

    TORONTO (S&P Global Ratings) June 3, 2021--S&P Global Ratings today said it assigned its 'BB+' issue-level rating and '3' recovery rating to Quebec-based telecom and wireless provider Videotron Ltee's proposed C$400 million and US$500 million unsecured debt. Videotron is a fully owned subsidiary of Quebecor Media Inc. (QMI). The '3' recovery rating on the proposed debt indicates our expectations for meaningful (50%-70%; rounded estimate: 65%) recovery in a simulated default.

    The company plans to use cash proceeds and about C$750 million cash on hand to fully repay the Videotron's 5% senior notes due 2022 and a portion of QMI's senior notes due 2023. Our net debt to EBITDA ratio (S&P Global Ratings' adjusted) is essentially unchanged and our 'BB+' issuer credit rating (ICR) on QMI is unchanged.

    For additional information, see the full analysis on QMI published Aug. 18, 2020, on RatingsDirect.

    ISSUE RATINGS - RECOVERY ANALYSIS

    Key analytical factors:

    • The issue-level and recovery ratings on Videotron's debt are unchanged.
    • QMI's (the holding company) secured debt is secured by the equity interests in the company's operating subsidiaries (Videotron and 68.4%-owned TVA Group Inc.) and other holding company-level assets. Hence, QMI is structurally subordinated to subsidiary-level creditors.
    • The current and future secured debt held by QMI's operating subsidiaries has the highest priority over their respective assets, followed by the unsecured debt held by each subsidiary. There are no cross-company guarantees among the operating subsidiaries' debt or guarantees from QMI.
    • Our simulated default scenario incorporates the assumption that QMI will default in 2026, following deterioration in the financial performance of Videotron--by far the largest contributor to QMI's cash flow. In this highly distressed scenario, we assume a combination of the following factors leads to a payment default at QMI: declining basic cable subscribers due to increased cord shaving, increased price competition, increased sales and marketing expenses, and higher debt from acquisitions and network investments.
    • We assume the company would be reorganized or sold as a going concern as opposed to being liquidated based on its viable business model and leading market share position in the Quebec telecom market.
    • Because the debt at Videotron has first priority, the enterprise value is first shared by Videotron debtholders. As a result, after the secured revolving debt is fully covered we estimate that Videotron senior unsecured noteholders could expect meaningful (50%-70%; rounded estimate: 65%) recovery, which corresponds to a '3' recovery rating and a 'BB+' issue-level rating.
    • There is limited value upstreamed to QMI debtholders after TVA's debtholders are paid. For QMI's secured debtholders, we estimate modest (30%-50%; rounded estimate: 40%) recovery, which corresponds to a '4' recovery rating and a 'BB+' issue-level rating.
    • Because all enterprise value has been allocated to the secured debtholders, for QMI's unsecured notes we expect negligible (0%-10%; rounded estimate: 0%) recovery in a distressed scenario, which corresponds to a '6' recovery rating and a 'BB-' issue-level rating (two notches below the ICR).

    Simulated default assumptions:

    • Simulated year of default: 2026
    • Emergence EBITDA: C$749 million
    • EBITDA multiple: 7x
    • Net recovery value after administrative expenses (5%): C$4.9 billion*
    • Obligor/non-obligor valuation split: 96%/4%

    Simplified waterfall (for Videotron):

    • Net recovery value for waterfall after administrative expenses (5%): C$4.8 billion
    • Estimated priority claims: C$1.32 billion

    ------------------------------------------------------

    • Remaining recovery value: C$3.5 billion
    • Senior unsecured debt and pari passu claims: C$5.1 billion
    • --Recovery range: capped at 50%-70% (rounded estimate capped at 65%)

    Simplified waterfall (for QMI):

    • Secured first-lien debt: C$265 million
    • Value available for secured claim (less value for Videotron and TVA): C$106 million
    • --Recovery range: 30%-50% (rounded estimate: 40%)
    • Estimated senior unsecured debt and pari passu deficiency claims: C$1.85 billion
    • --Recovery range: 0%-10% (rounded estimate: 0%)

    *Includes enterprise value from Videotron and TVA.

    Related Criteria

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