CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Rogers Communications Inc. (Rogers) two-tranche senior unsecured notes offering consisting of US$500 million of 10-year notes and US$500 million of 30-year notes. The Rating Outlook is Stable.
Rogers intends to use the net proceeds for general corporate purposes.
The terms and covenants of the new debt offering are virtually the same as Rogers existing debt. The notes are fully and unconditionally guaranteed by Rogers' wholly owned subsidiary, Rogers Communications Partnership, and rank pari passu with Rogers' existing unsecured senior debt.
KEY RATING DRIVERS
The ratings for Rogers reflect the solid profitability and free cash flow (FCF) generation from the significant operating leverage inherent in both the wireless and cable operations that has led to stable credit measures. Consequently, the company has significant flexibility in managing its financial policies including leverage targets and return of capital to shareholders.
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. This mix of assets should allow Rogers to sustain cash generation, adjusted for cash taxes, over the longer term. For 2013, Fitch expects Rogers to maintain leverage within its targeted net leverage range of 2.0x to 2.5x while returning a material level of cash to shareholders primarily through its dividend. Gross leverage at the end of 2012 pro forma for this debt issuance and accounts receivable draw was approximately 2.7x (including Fitch's adjustments). Net leverage was 2.3x. Fitch expects Rogers' net leverage will remain within the higher part of its range during 2013.
Both the wireless and cable operations have experienced greater competitive threats which will continue for the foreseeable future. Wireless postpaid voice ARPU has eroded considerably in the past due to increased competitive intensity in part from new entrants. The fourth quarter of 2012 was the first quarter since 2010 where postpaid ARPU stabilized and demonstrated growth year over year, reflecting the continued strong subscriber demand for data services and the moderating declines in voice ARPU. Consequently, wireless network revenue grew 4% in the quarter and 2% for 2012. Rogers also faces some challenges with continued improvement of postpaid churn thereby increasing net addition share to better sustain revenue growth over the longer-term. Rogers' Ontario markets, which are their largest, have experienced a greater level of competitive activity from new entrants.
The expansion of the IPTV footprint across Rogers' markets and aggressive pricing promotions has led to an increasing loss in basic cable subscribers. Consequently Rogers has focused on upgrades of its product offering to blunt these aggressive attacks. Rogers' investment to deploy a more robust Internet offering has resulted in the net addition growth of 73,000 high-speed internet subscribers in 2012 versus a loss of 83,000 basic cable subscribers. As such, the strong Internet growth and cable price increases more than offset cable subscriber loss resulting in operating revenue growth of 2% for 2012.
Rogers' strong focus on cost controls has also led to incremental margin expansion to support cash flow growth. Cost productivity enhancements have been driven by labor efficiencies, supplier-based opportunities and reduction in G&A expenses. In the wireless segment, other operating expenses (excluding retention spending) decreased by 2% in 2012 while cable operating expenses remained flat year over year.
The US$1 billion debt issuance will help fund a portion of Rogers' expected cash requirements during the next 12-18 months. In 2013, this includes maturities of US$350 million plus associated debt derivatives, an aggregate CAD700 million related to the Shaw transaction primarily in 2013, and a potential bid in the upcoming 700 MHz spectrum auction. Fitch estimates that the company could spend in the range of CAD500 million to CAD1 billion on the auction depending on several factors.
An auction spectrum cap limits large wireless service providers to 1 of the 4 prime paired spectrum blocks and 2 of the 5 total paired blocks. The unpaired lower blocks D and E are not subject to spectrum cap. Rogers may have an interest in bidding on the unpaired blocks leveraging AT&T Wireless' plan to use carrier aggregation technology within those spectrum blocks. In 2014, Rogers has US$1.1 billion of debt maturing plus associated debt derivatives.
Rogers is well positioned from a liquidity perspective to support these cash requirements as evidenced by its free cash flow (FCF) generation, cash, and availability under its committed facilities. Rogers' CAD2 billion credit facility that matures in July 2017 was undrawn at the end of 2012. Cash was $213 million as of Dec. 31, 2012. In addition, Rogers entered into a CAD900 million accounts receivable securitization program that expires in December 2015. Rogers took a CAD400 million initial draw in January 2013.
FCF for 2012 was approximately CAD612 million after Fitch adjustments including CAD803 million in dividends. Fitch's FCF expectations for 2013 are lower than 2012, in the range of CAD400 million to CAD450 million primarily due to expected increases for cash taxes of approximately CAD300 million and capital spending of approximately CAD60 million. Rogers estimates its pension contribution for 2013 at CAD96 million, a CAD11 million increase from 2012. Rogers' pension plan obligations were funded at a 71% level. As such, Fitch believes the company has sufficient flexibility to fund its pension deficit with existing cash flows.
Accordingly, including the lower end of FCF expectations for 2013, Rogers should have at least CAD2 billion in cash and CAD2.5 billion in undrawn availability to address its strategic objectives. The company will also continue to focus excess capital on its shareholders, since Rogers is within its targeted leverage range. However, Fitch expects future shareholder-friendly initiatives will be materially less than the average of CAD2 billion spent during 2009 to 2011. In 2012, Rogers returned approximately CAD1.3 billion via share repurchases and dividends. Rogers renewed its normal course issuer bid for 2013 to repurchase up to CAD500 million of its shares, down from CAD1 billion in the previous authorization.
Rogers maintains an aggressive dividend policy and payout ratio. The company increased its annual dividend for 2013 by 10% to CAD1.74 per share. Consequently, Rogers' growing dividend consumes a larger portion of its cash generation in light of its dividend payout ratio, which has increased from 21% in 2007 to 57% in 2012. Fitch expects Rogers will pace share repurchases with any excess cash, consistent with its current financial policies of net leverage below 2.5x.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating include:
--Commitment to leverage target less than 2.0x;
--Stable operating profile that will not materially decline in the face of IPTV and wireless competition.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
-- Discretionary actions by Rogers of adopting a more aggressive financial strategy or an event-driven merger and acquisition activity, that drives sustained net leverage beyond 2.5x without a sound de-leveraging plan.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies: Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Rating Telecom Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323
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