Canada's Rogers Ratings Downgraded Following Radio Spectrum Auction
Published on: 25th Feb 2014
By: Ian Mansfield
Fitch Ratings has affirmed Rogers Communications long term debt ratings but also revised them to Negative from Stable following its C$3.3 billion radio spectrum purchase last week
The ratings agency said tha the Rating Outlook revision to Negative is reflective of the increase in near-term financial risk associated with the spectrum acquisition. Notably, Fitch acknowledges the strategic importance and several longer-term advantages of this highly valuable spectrum that Rogers paid C4.32 per MHz/POP in its major markets. The amount is similar to prices paid in the U.S. for 700 MHz spectrum during past transactions.
Rogers should realize significant long-term benefits by aggregating the contiguous 700 MHz spectrum blocks to deploy a 20 MHz channel with increased bandwidth, capacity and coverage capabilities that enhances network quality. Rogers' subscribers with existing LTE devices such as smartphones, tablets and dongles will have immediate access to take advantage of this new spectrum once deployed. The spectrum acquisition also allows Rogers to leverage the existing AT&T ecosystem for 700 MHz devices. Consequently, Fitch believes this strategic investment should strengthen Rogers' ability to monetize increased data usage over the longer-term to drive growth in cash flows.
However, the cash requirements around the spectrum acquisition were substantially above Fitch's expectations for the spectrum auction and will increase leverage beyond the current 'BBB+' rating category for an extended period of time. Fitch estimates leverage at the end of 2014 will be in the range of 2.9 times (x)-3.0x. As such, Rogers has limited flexibility within its current rating for operating shortfalls, material unexpected cash requirements from other initiatives or any additional leveraging events. Thus, Rogers must reduce leverage expeditiously to improve its financial risk profile. Fitch believes Rogers has sufficient capacity with current free cash flow (FCF) expectations to reduce leverage through debt reduction and EBITDA growth back within its range during the next two years.
Key Ratings Drivers
The ratings reflect 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.
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. Rogers has also completed several strategic transactions in the past couple of years to secure rights for highly valued sports content. 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.
Financial Flexibility and Liquidity
Rogers' has significant cash requirements during 2014 of approximately CAD4.9 billion to address its strategic imperatives. This includes US$1.1 billion of debt maturing in early 2014, CAD3.3 billion associated with the spectrum auction and about CAD500 million in cash related to a couple smaller transactions.
Rogers' current liquidity includes CAD2.3 billion of cash and full availability under its CAD2 billion credit facility that matures in July 2017. Additionally, Rogers' CAD900 million accounts receivable securitization program, expiring in December 2015 has CAD200 million of availability. Fitch's FCF expectations for Rogers in 2014 are similar to 2013 levels. As such, Fitch believes Rogers will need to seek increased liquidity either through additional bank lines or the capital markets.
Rogers has focused excess capital on its shareholders through its dividend and share repurchases as Rogers was within its targeted leverage range. In the past five years, Rogers returned to shareholders an average of CAD1.6 billion. Going forward, Fitch believes Rogers will refocus its financial policy to ensure sufficient financial flexibility for the anticipated debt reduction. As such, Fitch expects the company will substantially moderate future increases to the dividend and refrain from share repurchases.
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.
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