Fitch Rates Rogers US$1 Billion Senior Notes 'BBB+'; Outlook Negative
OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Rogers Communications Inc.'s (Rogers) two-tranche US$1 billion senior notes offering. The U.S. offering consisted of US$700 million 3.625% senior notes due 2025 and an additional US$300 million to its existing US$750 million 5% senior notes due 2044 rated 'BBB+'. The Rating Outlook is Negative.
The net proceeds from the issuance are expected to be used to repay outstanding advances under Rogers' bank credit facilities and for general corporate purposes. See the full list of rating actions at the end of this release.
KEY RATING DRIVERS
Good Asset Mix, Restructuring Needs to Sustain Momentum
Fitch believes Rogers' mix of wireless and cable assets positions the company competitively and allows for significant revenue diversification through its robust bundled service offerings. Rogers has also completed several strategic transactions in the past couple of years to secure additional spectrum capacity in the 700 MHz auction and long-term rights for highly valued sports content. The mix of assets combined with good cost controls are key components that underpin Rogers' ability to sustain its profitability with strong internally generated cash flow evidenced by relatively consistent EBITDA and funds from operations (FFO) margins.
The strength of Rogers' operating margins is a good indicator of the company's ability to effectively manage challenges to its business profile from different influences like competition, regulation and technology risk. However, Rogers will need to improve execution of top-line growth initiatives by simplifying offerings, targeting investments to improve customer experience and improving productivity and sales discipline, as the firm has lagged its peers during the past couple of years. Year-to-date results have demonstrated progress on these initiatives with revenue growth up 5% after a 1.1% increase in 2014. Wireless revenue growth has been driven by a steady improvement in postpaid additions, the continued adoption of Rogers data share plans, which generate higher ARPU and ARPA and the Mobilicity transaction.
Both the wireless and cable operations have experienced greater competitive threats, which will continue. The expansion of IPTV footprint across Rogers' markets, which is now estimated at more than two thirds of its footprint, has led to an elevated loss in basic cable subscribers the past couple of years. The combination of Bell Mobility's and TELUS' wireless networks and deployment of GSM and HSPA technologies enabled Rogers' peers to level the playing field and take additional share.
Rogers is in the relative early stages of their restructuring plans, which has essentially rebuilt the company's foundation for its new customer-focused strategies. Failure to sustain progress as the plan matures through implementation during 2016 could further pressure Rogers' ratings given the elevated leverage related to the 700 MHz spectrum purchase.
Elevated Leverage
The Negative Rating Outlook reflects the increase in financial risk associated with Rogers' US$3.3 billion 700 MHz spectrum. The cash requirements were substantially above expectations although Fitch acknowledges the strategic importance and lumpiness related to the spectrum investment and that the company's wireless competitive position would be materially diminished without it.
Leverage at the end of the third quarter 2015 was 3.1x. With the elevated leverage, Rogers has limited ratings flexibility for operating shortfalls, material unexpected cash requirements from other initiatives, or other additional leveraging events. Fitch expects Rogers will reduce leverage to improve its financial risk profile primarily through debt reduction and EBITDA growth to less than 2.7x by 2016.
Rogers' deleveraging plans take on more importance considering Industry Canada's decision to reallocate spectrum licences in the 600 MHz band for mobile services. Canada expects to reallocate the same amount of spectrum licences as the U.S., providing the U.S. incentive auction that is scheduled for 2016 is successful, with a potential Canadian auction during the 2017 to 2018 timeframe. Fitch believes Rogers' would likely have strong interest in acquiring 600 MHz band spectrum to add to their robust spectrum portfolio. Fitch's current forecast does not consider potential investment for 600 MHz spectrum.
Proceeds from non-core asset sales could also provide additional deleveraging benefits, including Rogers US$1 billion-plus stake in Cogeco. However, Fitch does not include an asset sale of Cogeco in its financial analysis as a potential sale is highly speculative and uncertain.
Shareholder Returns Moderated
In the past, Rogers has focused excess capital on its shareholders through its dividend and share repurchases when Rogers was within the company's targeted leverage range of 2x-2.5x. From 2009 to 2012, Rogers returned to shareholders an average of CAD1.8 billion. The company has refocused its financial policy to improve financial flexibility for the anticipated debt reduction. The annualized dividend increase the past two years was 5%, a reduction from the double-digit dividend increases pre-2013. Rogers has also refrained from share repurchases since early 2013 and did not renew the normal course issuer bid program in February 2015.
KEY ASSUMPTIONS
Additional key assumptions within Fitch's internally produced rating case for the issuer include:
--Revenue growth in the low-to-mid-single digits with a 4.4% increase in 2015, declining modestly from 2015 levels in 2016;
--EBITDA of CAD5.1 billion in 2015 and CAD5.3 billion in 2016;
--2015 free cash flow (FCF) approximating 2014 levels, with FCF increasing materially in 2016;
--Leverage improving to 2.7x or less by the of 2016;
--Capital investment remains at similar levels to 2014 throughout Fitch's forecast period.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade is unlikely given Rogers' elevated leverage.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
--Discretionary actions by Rogers adopting a more aggressive shareholder-based financial strategy, a lack of commitment or focus on deleveraging, or an event driven merger and acquisition activity that delays the progress of anticipated deleveraging of the balance sheet to 2.5x by 2017;
--Rogers fails to sustain traction with current restructuring plan. Consequently, expected ARPU increases in cable broadband and wireless postpaid fail to materialize and subscriber trends in wireless postpaid, cable broadband and/or TV continue to decline at elevated levels driven by competitive pressures;
--EBITDA margins deteriorate by at least 200 basis points.
Solid Financial Flexibility and Liquidity
Rogers is well positioned from a liquidity perspective through undrawn capacity on its credit facility, accounts receivable program and FCF generation. Rogers generated CAD526 million in FCF (defined as cash from operations less capital spending less dividends) during the latest 12 months (LTM) period. Fitch's FCF expectations for Rogers in 2015 are now approximating 2014 FCF of CAD555 million which is a material improvement from initial expectations. The increase in FCF primarily reflects the value of the tax loss carry forwards acquired as part of the Mobilicity transaction that Rogers has fully utilized in 2015. In 2016, Fitch expects Rogers to materially increase FCF driven in part by EBITDA growth.
Rogers CAD2.5 billion revolving credit facility matures in July 2019. During the first quarter 2015, Rogers arranged a CAD1.0 billion term credit facility maturing in April 2017 with no scheduled principal payments prior to maturity. As of Sept. 30, 2015, Rogers had US$1.8 billion outstanding under the revolving and non-revolving credit facilities. At the beginning of 2015, Rogers' upsized its CAD900 million accounts receivable securitization program by CAD150 million to CAD1.05 billion and extended the program term to January 2018. The accounts receivable program had CAD859 million outstanding at the end of the third quarter 2015. With the drawdown on the credit facilities and receivable program, Rogers has flexibility to repay debt through FCF generation or asset sales.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating to Rogers:
--US$700 million senior unsecured notes due 2025 rated 'BBB+'.
Fitch currently rates Rogers as follows:
--Issuer Default Rating (IDR) 'BBB+';
--Senior unsecured notes 'BBB+'.
Date of Relevant Committee: April 1, 2015.
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