Telus Expects Low-Interest Bond Issue to Draw Competitors: Canada Credit
Stock Chart for Rogers Communications Inc (RCI/B)
Telus Corp., the wireless carrier that refinanced C$1 billion ($956 million) in debt to reduce interest payments, expects its competitors to do the same as they look to cut expenses and fend off new low-cost players.
“You’re going to see a number of Canadian issuers coming to the market following our lead,” Chief Financial Officer Bob McFarlane said in an interview. He named Rogers Communications Inc. as “quite likely” to refinance.
Telus and larger competitors BCE Inc. and Rogers are battling Wind Mobile, Mobilicity and Public Mobile, which are targeting cost-conscious customers with unlimited calling plans. Refinancing has provided Vancouver-based Telus and BCE more cash to reinvest in technology and service. The July refinancing will save Telus C$35 million a year, McFarlane said.
Analysts agreed with McFarlane’s assessment of more bond sales. Yields on corporate debt sold by Canadian companies are averaging 3.99 percent this year, down from 4.80 percent in 2009, according to Bank of America Merrill Lynch Index data. The drop in yields means a borrower saves $810,000 in annual interest on every $100 million raised in the bond market.
“Credit markets have an appetite for investment-grade debt like Rogers,” said Dvai Ghose, an analyst with Canaccord Genuity Corp. in Toronto. “I expect to see a lot more of that activity.”
Rogers, Canada’s largest mobile-phone operator, said on July 28 it would repay a $490 million note due in 2011 and C$635 million worth of debt also due next year. The Toronto-based company has $820 million of debt maturing in 2012. Rogers won’t comment on its credit market strategy until its redemptions are completed later this month, said company spokeswoman Terrie Tweddle.
Elsewhere in credit markets, the extra yield that investors demand to own corporate bonds rather than the nation’s government debt narrowed 1 basis point yesterday to 145 basis points, Merrill Lynch index data show. The spread is the narrowest since it reached 142 basis points, or 1.42 percentage point, July 27.
Company debt has returned 0.82 percent this month, including reinvested interest, compared with 0.2 percent in all of July, based on the Merrill Lynch index. Government debt has gained 0.41 percent, while provincial bonds have rallied 0.6 percent. Spreads on provincial debt widened 1 basis point yesterday to 60.
Canada sold C$3 billion of two-year notes, drawing an average yield of 1.524 percent. The government received bids of C$7.6 billion for the 1.5 percent securities maturing in December 2012, according to a statement today on the Bank of Canada’s website.
Canadian government bond prices rallied today, with the yield on the 10-year benchmark falling below 3 percent for the first time in more than a year to 2.98 percent at 12:55 p.m. in New York. Two-year bond yields declined 6 basis points to 1.385 percent.
Great-West Lifeco Inc., Canada’s second-largest life insurer, issued C$500 million in 4.65 percent notes due in 2020. The debentures from the Winnipeg-based company were priced to yield 156.7 basis points more than government debt. National Bank of Canada sold C$225 million in floating-rate notes that come due in 2012. HSBC Bank Canada issued C$100 million in three-year notes at floating rates.
Tembec Inc., a Montreal-based forest products company, bypassed Canada’s debt market to sell U.S.-dollar denominated securities. It sold $255 million of 11.25 percent notes due in 2018 at a spread of 921 basis points.
Telus sold C$1 billion of 5.05 percent notes on July 20 that are due in 2020 at a yield spread of 189.3 basis points. Proceeds were used to repay $613 million of $1.36 billion notes that have a coupon of 8 percent and mature next year.
“We’re financing long-term assets, our network build,” McFarlane said. “It’s like a house. Ideally, you want to finance a house with a longer-term mortgage. We just locked in long term at a good rate.”
Telus said last week its second-quarter adjusted net income rose 15 percent to C$286 million, or 89 cents a share, from $249.3 million, or 78 cents, a year earlier. A week earlier, Rogers reported profit that surpassed analysts’ estimates as new subscribers for smartphones and devices such as Apple Inc.’s iPad fueled data growth.
“In both Rogers’ and Telus’ case, these guys are gushing cash flow, and so when you have maturities approaching, you want to refinance them or even pay some of it down,” said Ghose of Canaccord Genuity. Ghose has a “buy” rating on Telus and recommends investors “hold” BCE and Rogers shares.
BCE, Canada’s largest phone company, repaid C$2.1 billion in debt and issued C$1 billion of five-year bonds last year, saving the Montreal-based company C$25 million annually. BCE may refinance more of its C$6.02 billion in debt before rates climb, Chief Financial Officer Siim Vanaselja said in April.
Bank of Canada policy makers next meet on Sept. 8 to decide monetary policy after raising interest rates in June and July. The chances of another 0.25 point rate increase stand at about 60 percent, according to Bank of Nova Scotia data.
Shaw Communications Inc., a Calgary-based cable-television operator with aims of entering the mobile-telecom business, is another potential issuer, said McFarlane. The company sold C$1.25 billion of 5.7 percent, 10-year notes in September to pay off U.S. dollar-denominated debt and fund working capital and possible acquisitions, it said at the time. The company also sold C$650 million in 30-year debt in November in part to pay for a planned wireless network.
Trevor English, Shaw’s vice president for capital markets, declined to comment on the company’s financing plans.
“I don’t think they have to rush to the market, but they are in a very different position from their three large-cap peers in as much as they are in heavy investment mode,” said Ghose.
Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.