Fitch Rates Rogers Communications' US$1.5B Debt Offering 'BBB+'; Outlook
CHICAGO -- September 26, 2013
Fitch Ratings has assigned a 'BBB+' rating to Rogers Communications Inc.'s
(Rogers) two-tranche senior unsecured notes offering consisting of US$850
million of 10-year notes and US$650 million of 30-year notes. The Rating
Outlook is Stable. Rogers intends to use the net proceeds for general
The terms and covenants of the new debt offering are virtually the same as
Rogers existing debt. The notes are fully and unconditionally guaranteed by
Rogers wholly owned subsidiary, Rogers Communications Partnership, and rank
pari passu with Rogers existing unsecured senior debt.
KEY RATING DRIVERS
The ratings reflects Rogers' consistent operating performance during the past
several years as its business segments have scaled further, both organically
and through acquisitions, resulting in a higher level of profitability and
cash flows. Rogers continued capital investment has enabled the company to
deploy a high quality infrastructure in a timely manner with good diversity of
service platforms to compete effectively against its mostly national peers.
Accordingly, Rogers' wireless and cable operations underpin the significant
leverage inherent in its operations that has led to stable credit measures.
Importantly, Rogers has demonstrated consistency with operating within its
targeted financial policy of net leverage within the 2-2.5x range for the past
several years. Fitch expects Rogers' net leverage will remain within the
higher part of its range during 2013. Rogers has maintained significant
flexibility in the past with managing its financial policies including
leverage targets and return of capital to shareholders.
Fitch believes Rogers' mix of cable and wireless assets competitively
positions the company and allows for significant revenue diversification
through its robust bundled service offer. This mix of assets should allow
Rogers to sustain cash generation, adjusted for cash taxes, over the longer
term. As the cable and wireless segments further mature, Rogers will need to
seek other avenues in emerging businesses to cultivate growth.
Regulatory and Spectrum
Industry Canada's decision during the summer to reject Telus' acquisition of
Mobilicity reinforces its desire for four wireless providers in every region
of Canada. However, the lack of a well-capitalized foreign operator placing a
deposit to participate in the upcoming auction creates substantial doubt with
this goal and significantly reduces the likelihood of higher spectrum prices
associated with a more competitive auction.
Three of the larger new entrants (Mobilicity, Public Mobile and Wind Mobile)
have faced significant financial challenges that could result in a bankruptcy,
sale (Public Mobile) and/or recapitalization. Absent additional regulatory
policy changes, the attractiveness of the Canadian market for any entity to
consolidate these new entrants and operate as a fourth standalone player is
highly questionable given current market dynamics. Several regions in Canada
already have a viable fourth competitor with their wireless services bundled
along with a cable offering. As such, Fitch believes wireless as part of a
bundled offering is a necessary must-have component for longer-term
Rogers' options to acquire advanced wireless services spectrum from Shaw
Communications and Videotron could face challenges from Industry Canada. The
government delayed the 700 MHz spectrum auction until January 2014 in part
given competitive concerns around spectrum license transfers.
Financial Flexibility and Liquidity
Rogers' most recent US$1.5 billion debt issuance will help fund a portion of
the expected cash requirements during the next 12-18 months. This includes
US$1.1 billion of debt maturing in early 2014 plus associated debt derivatives
and a potential bid in the upcoming 700 MHz spectrum auction. Fitch estimates
that the company could spend in the range of CAD5000 million to CAD1 billion
on the auction depending on several factors. In March 2015, Rogers has US$830
million of notes maturing plus associated debt derivatives.
Consequently, Rogers is well positioned from a liquidity perspective to
support on-going cash requirements as evidenced by its free cash flow (FCF)
generation, balance sheet cash and availability under its committed
facilities. Rogers' CAD2 billion credit facility that matures in July 2017 was
undrawn as of June 30, 2013. Cash was $875 million. Rogers' CAD900 million
accounts receivable securitization program, expiring in December 2015, has
CAD250 million of availability. Fitch's FCF expectations for 2013 is at least
CAD350 million. This compares to FCF for 2012 of approximately CAD612 million
after Fitch adjustments including CAD803 million in dividends. The lower FCF
is due to expected increases for cash taxes, dividend and capital spending.
Rogers estimates its pension contribution for 2013 at CAD96 million, a CAD11
million increase from 2012. Rogers' pension plan obligations were funded at a
71% level at the end of 2012. As such, Fitch believes the company has
sufficient flexibility to fund its pension deficit with existing cash flows.
Fitch anticipates the company will also continue to focus excess capital on
its shareholders primarily through its dividend as Rogers is within its
targeted leverage range. However, Fitch expects future shareholder-friendly
initiatives will be materially less than the average of CAD2 billion spent
during 2009 to 2011. In 2012, Rogers returned approximately CAD1.3 billion via
share repurchases and dividends. The company renewed its normal course issuer
bid for 2013 to repurchase up to CAD500 million of its shares, down from CAD1
billion in the previous authorization. Fitch does not expect material
repurchases in 2013 given Rogers cash requirements within the business.
Rogers maintains an aggressive dividend policy and payout ratio. The company
increased its annual dividend for 2013 by 10% to CAD1.74 per share or
approximately CAD875 million annually. Consequently, Rogers' growing dividend
consumes a larger portion of its cash generation in light of its dividend
payout ratio, which increased from 21% in 2007 to 57% in 2012.
Longer-term, Fitch believes Rogers will take steps to ensure sufficient
financial flexibility as the company balances its strategic objectives with
shareholder returns. As such, Fitch expects the company will moderate future
increases to the dividend due to the current high payout ratio. During 2013,
Rogers launched a nascent credit card operation, which if successful, could
consume a material level of cash from operations beyond 2013. Fitch believes
these operations could represent a higher level of risk. Rogers will need to
prudently manage the credit card business with the appropriate internal
controls to mitigate this increased risk. Fitch also does not expect material
changes to the high level of capital spending given the competitive need to
invest in the network.
Positive: Future developments that may, individually or collectively, lead to
positive rating include:
--Commitment to gross leverage target less than 2.0x which Fitch does not
believe is likely at this time.
Negative: Future developments that may, individually or collectively, lead to
negative rating include:
--Discretionary actions by Rogers of adopting a more aggressive financial
strategy or an event driven merger and acquisition activity, that drives
sustained net leverage beyond 2.5x without a sound de-leveraging plan.
--Weakened operating performance driven by competitive intrusions.
--The risk, while potentially low, of a well-capitalized foreign operator
consolidating the new entrants and investing in new spectrum which could lead
to material pressure on postpaid subscriber bases of the three incumbents.
--Material increase in shareholder based initiatives.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Telecom Companies: Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating Telecom Companies
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Bill Densmore, +1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
David Peterson, +1-312-368-3177
John Culver, +1-312-368-3216
Brian Bertsch, +1-212-908-0549 (New York)
Press spacebar to pause and continue. Press esc to stop.