Debt Agency Confident Canadian Telcos Can Maintain Ratings

In a new study - the debt ratings agency, DBRS says that despite the evolving dynamics of the communications sector, the Canadian telcos still have the ability to maintain their ratings which currently span the BBB and "A" rating ranges. Of the seven telcos covered in the study, Bell Canada (Bell, rated "A") and Rogers Wireless (Rogers Wireless, rated BBB (low)) represent the bookends of the industry.

The belief that the telcos can maintain their ratings despite the changing competitive environment is supported by the various telcos' market positions, revenue growth strategies, the ability to resize their cost bases, size and scale, financial flexibility as well as the potential for further debt reduction.

Although the current rating ceiling of "A" is still deemed appropriate, DBRS does acknowledge that any further structural shifts through technological or regulatory change, or accelerated changes in the competitive environment - such as aggressive residential voice pricing - could lower this ceiling by one notch to A (low).

"The lead indicator of this change," says Chris Diceman, DBRS analyst and one of the authors of the study, "will relate to any substantial deviation to the telcos' current ability to maintain and even grow cash flow from operations."

DBRS adjusted its ceiling for the Canadian incumbent telcos in late 2005 from A (high), reflecting the end of the incumbent's dominance of the local residential voice market. The key issue still remains the ability of the incumbent telcos to protect their customer franchises from the cable operators.

"Local voice service is deemed the critical product, for without providing this service, you are effectively shut out from selling long-distance, Internet and video services to that subscriber," notes Mr. Diceman. "Up until 2005, the incumbent telcos managed to keep local residential market share above 90%, which was superior to most incumbent telcos in other parts of the world."

DBRS believes that 2007 could be the point of inflection for incumbent telco access line losses in Canada, as the cable operators' window of opportunity is expected to be shortened by reduced winback restrictions, deregulation and the ability of the telcos to defend their customer bases with a more competitive quadruple-play offering.

In order to maintain their ratings, DBRS believes that the Canadian telcos will need to defend their customer bases as these are their biggest assets and the key driver of their cash flow from operations. Therefore, DBRS does not solely focus on the quarterly customer access-line loss numbers, but also the number of customers that the telcos have successfully bundled into taking multiple services.

"This will be the critical indicator of the future cash-flow-generating ability of the incumbent Canadian telco industry," says Mr. Diceman. "Despite all the future uncertainties in the Canadian telecom industry, DBRS can be certain that the cash-flow-generating ability will continue to be the ultimate determining factor of the Canadian telcos' credit ratings."

Posted to the site on 3rd April 2007