Pegasus Down On Debt Pressures; Quebecor Media Stabilizes

Standard & Poor's lowered the corporate credit rating of Pegasus Communications' and its related entities' from B to CCC+, as liquidity pressures subsist against an approximate $1.3 billion total debt load. Factors such as unfavorable subscriber growth trends and an unclear view of long-term business success reflect the new rating. S&P also states that approaching maturities and limited access to capital augment the near-term financial risks. Aggressive, debt-financed DirecTV rural franchise and heavy subscriber acquisition activity also contributes to thin interest coverage, cash flow deficits and significant capital requirements.

Pegasus' advantages include its satellite direct-to-home subscriber base, brand visibility and weaker cable competition in rural markets. The company has also taken steps to alleviate churn rates by targeting higher credit quality customers, reducing bad debt expenses and emphasizing lower-cost distribution channels. Calls to Pegasus were not returned for comment.

* Quebecor Media and its Sun Media and Videotron subsidiaries are refinancing debt and generating positive free cash flow, causing Moody's Investors Service to revise its outlook from negative to stable. Quebecor has a B1 senior implied rating and a B2 unsecured rating, while Sun Media's senior secured rating stands at Ba2 and its proposed senior unsecured rating is Ba3. Videotron's senior secured rating is Ba3.

Quebecor's shareholders are repaying a C$429 million non-recourse loan, so that Quebecor is not using its own resources, further improving the media holding company's debt position. Sun Media is issuing $200 million in senior secured debt and $200 million in senior unsecured notes in order to pay off its debt and provide a dividend of C$220 million to Quebecor, which will invest C$150 million in Videotron. The debt issuance shuffle of proceeds throughout the subsidiaries and holding company is expected, in part, to stabilize Videotron's debt covenant obligations.

Quebecor's ratings are constrained by the structural subordination of its debt to the debt of its companies, as well as its dependence on Sun Media for its cash flow in order to service debt. Moody's further notes that a strike at Videotron--the third largest Canadian cable company--adds to credit concerns and intensifies its continuing covenant pressure. Calls to Quebecor officials were not returned by press time.