Debt rating agencies DBRS and Moody's downgrade divisions of Canwest

TORONTO - Darker skies are gathering over Canwest Global Communications Corp. (TSX:CGS) after debt rating agency DBRS downgraded two divisions of the company on Monday with the media conglomerate facing a deadline at the end of the week for a $100-million debt facility.

Canwest Media Inc. and Canwest LP were both slapped with lower ratings and placed under further review by the Dominion Bond Rating Services on concern the broadcasting and publishing company won't be able to dig itself out from under its debts.

"DBRS believes that Canwest Media's financial flexibility is extremely limited as it is not currently in compliance with its bank covenants regarding its $300-million credit facility," the rating agency said in a release on Monday.

Canwest Media's rating was downgraded to CCC from B-high, while Canwest LP was shifted to CCC-high from BB-low - both considered below investment grade.

Moody's Investors Service also downgraded Canwest Media Inc.'s corporate family rating and probability of default rating to Caa3 from B3.

The corporate family's consolidated speculative grade liquidity rating remains SGL-4, indicating poor liquidity, and the company's ratings outlook remains negative.

At the same time, ratings for Canwest and its two rated affiliates, CW Media Holdings Inc. and Canwest Limited Partnership were also downgraded, the ratings agency said.

The latest revisions come just days after Canwest president and CEO Leonard Asper sent an internal memo to staff downplaying reports that the company is in financial strife.

"In all the media coverage what is often overlooked is that Canwest's businesses are highly profitable and generate well over $500 million a year in operating profits," he wrote.

"We are in the midst of a very structured process that has a number of checkpoints. Getting a financial agreement with our lenders is one of those checkpoints as is potentially selling some assets ... reducing our cost structures and finding new sources of revenue."

DBRS said that Canwest is still talking to its bankers, and if it fails to renegotiate its $100 million debt facility by Friday, then it'll be in a default position.

Canwest owns the Global television network in Canada, a chain of big-city Canadian daily newspapers and broadcast operations in several countries.

The company also owes about $3.9 billion in debt.

RBC Dominion Securities, its adviser, and has been scouring the market searching for last-minute financing.

Asper told staff in the memo that the company needs to continue operating as usual.

"We still have to produce newspapers, web pages and television programs and these all need to be supported with advertising. From what I can see, we are doing this as well, if not better than anyone out there right now," he said.

Canwest is facing a downturn in advertising revenues spurred by a struggling economy, and the company recently cut 560 jobs, or about five per cent of its workforce.

To turnaround its operation it's trying to sell its five E! network conventional television stations across Canada, and cutting expenses throughout the company.

However, DBRS said the sale is "likely great enough to offset the company's operating pressure and put Canwest Media onside with its debt covenants."

Canwest has also said that it could put other assets up for sale in order to survive.

"The properties themselves, viewed separately from the financial debacle of the parent company, are actually fairly robust businesses that seem to be weathering the downturn as well as can be expected," suggested Carmi Levy, a media analyst at AR Communications Inc.

Industry observers have suggested that several suitors would line up for some of Canwest assets, particularly its lucrative specialty channel division, which is not currently up for sale.

Both Corus Entertainment Inc. (TSX:CJR.B) and Astral Media Inc. (TSX:ACM.B) have been named as two interested buyers of the cable assets. Neither company returned calls for comment.

Last week, Rogers Media Inc. (TSX:RCI.B) president and chief executive Tony Viner said he too would be interested in looking at the cable assets, which include the History Channel, Slice, and HGTV.

Canwest shares rose a penny to 36 cents on the Toronto Stock Exchange.