Canwest Credit Rating Taken Down A Couple Of Notches, Eh?

 Fitz: Moody’s Investor Services Thursday downgraded by two notches the credit and default probability ratings of Canwest Media, the Winnipeg-based newspaper and television subsidiary of Canwest Global Communications.

Canwest “is expected to be only barely cash flow positive during the year,” Moody’s said. Combined with its high debt load of $3.6 billion, the falling ad revenues for Canadian newspapers and broadcasters, and the precipitously falling value of Australian TV stations it might try to sell to raise cash, Canwest will have “no meaningful ability to reduce its debts from internally generated cash flow for at least the next couple of years,” write Alexandra S. Parker at Moody’s New York City headquarters and William Wolfe in Toronto.

Canwest, publisher of the national National Post, The Ottawa Citizen and nine other dailies across Canada, recently renegotiated loan terms with its lenders that include changes to the maximum allowable  leverage ratios (debt to EBITDA). But Moody’s concludes Canwest could be scraping up against them within this calendar year.

Moody’s downgraded Canwest’s corporate family rating and probability of default rating to B3 from B1. The new ratings are on the low end of the “very speculative” B rating, in other words, quite deep in junk territory.

Canwest’s “speculative grade liquidity” rating was also downgraded to SGL-4 (poor liquidity) from SGL-3 (adequate liquidity).

To top it off, Moody’s slapped a negative outlook on Canwest, which normally would indicate a further downgrade is likely -- but reading the analysis it seems downright certain Moody’s will be coming back to ratchet down their ratings.

Read the full analysis for yourself below:

Toronto, January 08, 2009 -- Moody's Investors Service downgraded Canwest

Media Inc.'s (Canwest) corporate family rating (CFR) and probability of
default rating (PDR) to B3 from B1 while also downgrading the corporate
family's speculative grade liquidity (SGL) rating to SGL-4 (poor
liquidity) from SGL-3 (adequate liquidity). At the same time, instrument
ratings for Canwest and its two rated affiliates, CW Media Holdings Inc.
and Canwest Limited Partnership, were also downgraded (see ratings
listing below). The rating actions concluded a review initiated on
October 30, 2008.

The long term ratings downgrade is based on our assessment that the
combination of very poor business conditions and elevated debt leverage
will leave the company with no meaningful ability to reduce its debts
from internally generated cash flow for at least the next couple of
years. In particular, the ongoing recession is exacerbating the impact of
secular changes to advertising patterns that have likely permanently
impaired prospects for Canadian conventional television broadcasters. In
turn, since Canwest needs to de-lever as it prepares for the likelihood
of debt increasing in 2011 as a consequence of potential contingencies
related to the shareholder agreement between, effectively, its
conventional and specialty broadcast operations, this combination of
cyclical and secular influences has the implicit impact of increasing
leverage, has an adverse ratings impact, and also influences the negative
outlook.

Given this background and with very weak growth prospects in newspaper
publishing operations (also caused by evolving advertising patters)
suggesting that relief in the form of excess cash being sourced from
Canwest Limited Partnership is unlikely, Moody's had previously concluded
that Canwest would have to divest of its Australian television properties
in order to address the television operations' shareholders agreement
contingencies. With advertising revenues contracting as global economic
growth slows and with general financial market dislocation, the market
value of the Australian properties has declined precipitously and it is
unclear if and when value will recover. Consequently, the company will
not be able to rely solely on asset sales for de-leveraging, and, over
time, this may lead to a significant reconfiguration of debt financing.
This potential also provides an adverse ratings influence. However, since
the company appears to have little near term ability to initiate any such
actions -- the markets are not accessible and bank credit agreements and
bond indenture provisions suggest that the company does not have access
to sufficient existing debt capacity with which to accomplish a partial
refinance that would have a material impact -- ratings' impact is
contained at the B3 level, albeit this matter also influences the
negative outlook.

The potential for financial covenant compliance issues later this calendar
year caused the SGL rating downgrade. Despite Canwest having recently
negotiated amended financial covenants for its revolving credit facility,
there is the potential of non-compliance later this year. While cost
savings initiatives are expected to partially offset the impact of
declining revenues, and capital expenditure discipline will also conserve
cash, Canwest is expected to be only barely cash flow positive during the
year. This adversely impacts the ability to comply with financial
covenants whose thresholds tighten over time. However, given Canwest's
bank lenders' $300 million commitment is well protected by a first
ranking position over assets that include Canadian conventional broadcast
operations and the 56% equity position in the Australian television
asset, the situation is expected to be resolved. While this matter
adversely impacts the SGL assessment and drives the SGL-4 rating, it does
not yet directly impact the fundamental rating. It does, however, play a
role in the ratings outlook being negative, with further ratings actions
being possible if the matter is not resolved expeditiously.

Downgrades:

..Issuer: Canwest Media Inc.

....Corporate Family Rating, Downgraded to B3 from B1

....Probability of Default Rating, Downgraded to B3 from B1

....Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3

....Senior Subordinated Regular Bond/Debenture, Downgraded to Caa2 (LGD6,
91%) from B3 (LGD6, 92%)

..Issuer: Canwest Limited Partnership

....Senior Secured Bank Credit Facility, Downgraded to Ba3 (LGD2, 18%)
from Ba2 (LGD2, 20%)

....Senior Subordinated Regular Bond/Debenture, Downgraded to Caa1(LGD4,
67%) from B2 (LGD5, 70%)

..Issuer: CW Media Holdings Inc.

....Senior Secured Bank Credit Facility, Downgraded to Ba3 (LGD2, 18%)
from Ba2 (LGD2, 20%)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1(LGD4,
67%) from B2 (LGD5, 70%)

Outlook Actions:

..Issuer: Canwest Media Inc.

....Outlook, Changed To Negative From Rating Under Review

For additional commentary, please refer to the associated Credit Opinion
(available on Moodys.com within a day of this press release). A loss
given default assessment detailing the company's consolidated waterfall
of liabilities will also be posted to Moodys.com.

Moody's most recent rating action concerning Canwest was taken on October
30, 2008 at which time Moody's placed the company's ratings on review for
possible downgrade. Today's rating action concludes the review.

Canwest's ratings were assigned by evaluating factors Moody's believes
are relevant to the credit profile of the issuer, such as i) the business
risk and competitive position of the company versus others within its
industry, ii) the capital structure and financial risk of the company,
iii) the projected performance of the company over the near to
intermediate term, and iv) management's track record and tolerance for
risk. These attributes were compared against other issuers both within
and outside of Canwest's core industries and Canwest's ratings are
believed to be comparable to those of other issuers of similar credit
risk. Other methodologies and factors that may have been considered in
the process of rating these issuers can also be found in the Credit
Policy & Methodologies directory (including, among others: Probability of
Default Ratings and Loss Given Default Assessments for Non-Financial
Speculative-Grade Corporate Obligors in the United States and Canada
(August 2006; document #98771) and Speculative Grade Liquidity Ratings
(September 2002; document #76003)).

Canwest Media Inc. (Canwest) is wholly-owned by Winnipeg, Manitoba,
Canada-based Canwest Global Communications Corp., a publicly traded
international media company with interests in broadcast television,
publications, radio, specialty television channels, out-of-home
advertising and interactive operations in Canada, Australia, Malaysia,
Singapore, Indonesia, Turkey, the United Kingdom and the United States.
Substantially all of the publicly traded parent company's operations are
held though Canwest.