Fitch Ratings-Chicago-April 23: Fitch Ratings has assigned a 'BBB+' rating to Rogers Communications Inc.'s multi-tranche USD1.25 billion 30-year and CAD1 billion 10-year senior notes offering.
The Rating Outlook is Stable. A full list of Rogers' ratings follows at the end of this press release. Proceeds from the senior notes offering will be used for general corporate purposes, including to fund maturing short-term borrowings and to fund all or a portion of the $1.725 billion payment required for 600 MHz wireless spectrum licenses.
KEY RATING DRIVERS
Mid-2x Leverage: Leverage pro forma for the spectrum acquisition is modestly elevated at approximately 2.7x. Fitch views the 600 MHz spectrum acquisition as a strategically important means of bolstering Rogers' leading spectrum position that will enable a cost-effective deployment of 5G on a national basis. Depending on the 5G use case, Rogers can also supplement key areas with higher capacity mid-band and high-band spectrum. Fitch expects leverage will moderate back to within its targeted range due to current operating momentum in Rogers' core Internet and wireless segments that should result in mid-single-digit EBITDA growth with meaningful FCF generation to support debt reduction. Commitment to Rating: The ratings are supported by Rogers' public commitment to maintaining leverage in the 2.0x to 2.5x range over the longer term. Fitch believes that Rogers' management team and Board of Directors are in alignment and will continue to demonstrate a consistent financial policy that prioritizes a strong balance sheet. This is evidenced by the past year-to-year deferral with dividend increases (since 2015) and share repurchases (since 2013) following elevated leverage related to the 700 MHz auction in 2014. Fitch also views the Rogers family's control of the company as a credit positive that serves as an underlying anchor with a long-term investment horizon. While the company repurchased approximately $155 million in shares and increased the dividend by 4% during the first quarter of 2019, Fitch expects Rogers will look to maintain a balanced capital allocation policy that considers the long-term leverage target, shareholder returns and the potential for additional spectrum investments in future auctions.
Good Asset Mix: Rogers' good mix of telecom and cable assets strongly positions the company and allows for significant revenue diversification. Robust bundled service offerings are supported by its national Canadian wireless operations and strong regional market positions that offer telecom-oriented services to consumers and businesses. Rogers has entered into several strategic transactions during the past several years to bolster its asset portfolio including spectrum, sports content and Comcast (NASDAQ:CMCSA)'s X1 IP-based video platform to improve its cable competitive position. The approximately CAD1.4 billion Cogeco stake as of March 31, 2019 serves as a long-term strategic hedge and provides added financial flexibility.
Sustained Core Operational Improvement: Rogers' core Internet and wireless segments continue to demonstrate good earnings momentum supported by a focus on customer base management, investments in customer experience and effective cost controls. The wireless segment continues to experience positive trends in gross add share, churn, ARPA/ABPU and net subscribers to support service revenue growth in the mid-single digit range. Internet revenues have also shown good growth in the 6% to 7% range. Broadband growth has more than offset declines in television (down 4% in 2018 and 2% in 1Q'19) and telephony (down 12% in 2018 and 21% in 1Q'19). Higher margin Internet revenues contributed 55% of total cable revenues for the first quarter of 2019, an increase from 44% since the beginning of 2015. Rogers has begun scaling Comcast's X1 IP based video platform and has added approximately 100,000 subscribers to the Ignite TV platform. This should enhance the customer experience and drive improved ARPA, which will be particularly important as over-the-top video pressure is likely to increase over time.
DERIVATION SUMMARY
Fitch views Rogers' business risk profile as relatively similar to TELUS Corp.'s (BBB+/Stable). Both companies have strong competitive positions with business profiles benefitting from diversified operations, including leading positions as national wireless operators in the Canada and strong regional market positions offering telecom-oriented services to consumers and businesses. TELUS has also diversified in several areas via acquisitions; the healthcare segment is its most significant vertical industry, and business process outsourcing through TELUS International has also been expanded. TELUS has demonstrated strong execution on its strategic initiatives with growth in its wireless business, high-speed internet services and IPTV platform. The growth in the wireless business has been supported by very low post-paid churn. With the improved operating momentum demonstrated during the past couple of years, Rogers has sustained operational results that are now in-line with TELUS'. Both companies' financial profiles are modestly weak for their 'BBB+' ratings as both have slightly elevated leverage due primarily to past spectrum acquisitions and, in the case of TELUS, high capex during 2016 and 2017. Leverage for both companies recovered to mid-2x range in 2018, and Fitch expects modestly elevated leverage following the most recent spectrum auction. Fitch expects both companies will refrain from material share repurchases over the forecast period due to further expected investments in upcoming 3.5 GHz and millimeter wave spectrum auctions. Fitch also expects Rogers to increase capital intensity during the next several years for investments in network and fiber assets. TELUS' capital intensity is likely to decline given their more robust past investment cycle for broadband infrastructure to support TV and high-speed Internet subscriber growth.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case in 2019 for the Issuer:
--Consolidated revenue increase of approximately 4% in 2019 to the mid-CAD15 billion range; this compares to the company guidance in the 3% to 5% range; -
-EBITDA growth of approximately 6% to CAD6.4 billion; this compares to the company guidance in the 7% to 9% range;
--Capital spending of approximately CAD3 billion; this compares to the company guidance of CAD2.85 billion to CAD3.05 billion;
--FCF in the CAD500 million range;
--Leverage (gross debt to EBITDA) of approximately 2.6x in 2019, declining modestly in 2020 as forecast assumes additional spending on spectrum.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action Positive rating actions are not anticipated in the intermediate term given the current financial policy and higher leverage but could occur on sustained strong operating performance in the wireless and cable operations combined with:
--Company commitment to maintaining gross leverage at a level lower than anticipated, i.e. in the range of 1.5x to 1.7x;
--FFO Fixed Charge Coverage sustained over 6x. Developments That May, Individually or Collectively, Lead to Negative Rating Action
--Gross leverage greater than the mid 2x due to a combination of acquisitions, spectrum purchases and high capital spending in the absence of a credible deleveraging plan;
--FFO Fixed Charge Coverage trending below 5x; --Debt-funded stock repurchases, to the extent such purchases delay anticipated delivering;
--Operating profit declines owing to greater-than-anticipated competition could lead to a negative action if a return to stability is uncertain.
LIQUIDITY
Good Liquidity: Rogers is well positioned from a liquidity perspective with expectations for consistent FCF generation and substantial undrawn capacity on its credit facilities. Available liquidity totalled approximately CAD1.9 billion at the end of the first quarter of 2019. Rogers total revolving credit facility commitment is CAD3.2 billion with CAD700 million maturing in 2021 and CAD2.5 billion maturing in 2023. The revolving facility was undrawn at March 31, 2019 with 1.2 billion of net availability. The revolving credit facility backstops the company's US$1.5 billion commercial paper program that had CAD$2 billion outstanding at the end of first quarter 2019. Rogers maintains a CAD1.05 billion accounts receivable program, maturing in November 2020, that had CAD650 million drawn leaving CAD400 million of availability. Cash and cash equivalents was CAD264 million. Rogers also supplemented liquidity following the conclusion of the spectrum auction by entering into a new US$2.2 billion (CAD2.9 billion) non-revolving credit facility which can be borrowed against until May 31, 2019 after which borrowings come due March 2020. Rogers generated approximately CAD456 million in FCF (FCF defined by Fitch as cash from operations less capital spending less dividends) in 2018. For 2019, Fitch expects FCF modestly higher with increased operating cash flows somewhat offset by higher capital spending. Long-term notes maturities are material but manageable during the next three years and include CAD500 million remaining in 2019 following CAD400 million that matured in March, CAD900 million in 2020 and CAD1.45 billion in 2021.
FULL LIST OF RATING ACTIONS
Fitch currently rates Rogers' as follows:
--Long-Term Issuer Default Rating 'BBB+';
--Senior unsecured notes 'BBB+'. The Rating Outlook is Stable.
Contact: Primary Analyst William Densmore Senior Director +1-312-368-3125 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson David Silverman, CFA Senior Director +1-212-908-0840 Date of Relevant Rating Committee: Aug. 22, 2018 Summary of Financial Statement Adjustments Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below --Adjustments are made to total debt to account for the on balance sheet financial derivatives; --Reclassification of investing cash flow to working capital. Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria - Effective from 23 March 2018 to 19 February 2019 (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018) https://www.fitchratings.com/site/re/10036366 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Solicitation Status https://www.fitchratings.com/site/pr/10071954#solicitation Endorsement Policy https://www.fitchratings.com/regulatory
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