- Borrowing costs spike on Wind Mobile-deal financing concern
- A credit cut to junk would be like `one foot in the grave'
Shaw Communications Inc. is facing key hurdle in its bid to turn Canada’s Big Three wireless phone companies into the Big Four: assuring lenders it won’t sacrifice its credit rating in the battle.
Shaw’s cost of financing in the bond market has spiked since Standard & Poor’s said last month the company’s plan to spend C$1.6 billion ($1.1 billion) to acquire Wind Mobile Corp., Canada’s fourth-largest wireless carrier, could tip its rating from investment grade into junk. Shaw has said it won’t let that happen, and it will have the chance to explain how when it presents quarterly earnings Thursday afternoon in Calgary.
A junk rating from two or more major credit raters would be expected to result in Shaw’s cost of borrowing rising another 20 percent from current levels, just as it steps up capital spending to transform from a cable-TV provider in Western Canada to a national wireless-phone carrier. To protect its rating, Shaw may have to find some way to finance those ambitions -- possibly with asset or share sales -- to avoid its debt levels rising too high.
"They’re probably going to make some small divestitures to help things along because the rating agencies probably don’t have the patience to wait years, as opposed to several months, to get leverage back down," said Bill Girard, who manages C$20 billion for 1832 Asset Management LP, including Shaw bonds. "That’s what bondholders want to hear."
Shaw’s announcement of the deal on Dec. 16 was followed the next day by S&P saying it could cut the company’s BBB- credit rating one level if it believed the acquisition would weaken profitability or cash flow, or if it elevated Shaw’s ratio of debt to earnings, or leverage, over a sustained period. A downgrade would put Shaw at BB+, the highest junk level, with an average borrowing premium of 320 basis points over government debt, according to Bank of America Merrill Lynch Index data.
"That would certainly increase the cost of their debt financing, and it may reduce the number of investors that would be willing to buy the credit," said Greg Jeffs, chief investment officer of Toronto-based debt hedge fund Algonquin Capital Corp. "It certainly doesn’t help their access to the market."
The skittishness from Shaw’s current bondholders isn’t only because a sub-investment-grade rating is meant to reflect a riskier investment, but because many bond funds are prohibited outright from owning junk.
"Investment-grade portfolios have to sell something that goes to BB in the index," said Stephen Dafoe, a corporate-bond analyst at Bank of Nova Scotia. "Even having one foot in the grave, so to speak, is damaging to spreads, and some investors will bow out."
Chethan Lakshman, a spokesman for Shaw, referred questions on the company’s credit rating to the analyst call of Dec. 17, citing a blackout period before it releases earnings.
The acquisition of Wind, a mobile upstart that’s sought to take on the big incumbents -- Telus Corp., Rogers Communications Inc. and BCE Inc., which control 90 percent of the market -- is a strategic necessity for Shaw, company executives said on the call with analysts. Its cable customers increasingly consume television content on their phones through a data connection, rather than through cables in their homes.
On the same call, Shaw Chief Financial Officer Vito Culmone said the firm was committed to financing the purchase in a way that would maintain its rating, possibly by including asset sales, like real estate, or new equity offerings in the financing mix.
Funding the Wind acquisition entirely with debt would likely result in a downgrade and much higher borrowing costs, something Shaw likely wants to avoid, Andrew Calder, a credit analyst at Royal Bank of Canada, wrote in a note to clients Tuesday. Funding the deal half with debt and getting the rest through equity or asset sales, including possibly ViaWest, its data-center subsidiary, would likely preserve the credit rating, Calder wrote.
"The ultimate financing mix of debt, equity, and potential asset sales, as well as several years of restrained shareholder distributions, will be key to protecting credit quality," S&P analysts led by Donald Marleau wrote.