CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Rogers Communications Inc.'s (Rogers) benchmark sized US 10-year senior notes offering. The Rating Outlook is Stable.
Rogers intend to use a portion of the net offering proceeds to repay a portion of the outstanding advances under bank credit facilities and borrowings under the accounts receivable securitization program. The drawdowns under the bank credit facilities and the securitization program that are expected to be repaid were principally used for general corporate purposes including, among other items, to fund the repayment of a portion of the then outstanding $1.0 billion aggregate principal amount of 5.8% senior notes due 2016 (which notes are no longer outstanding). Roger intends to use any remaining net proceeds for general corporate purposes, which may include, among other things, funding the repayment of any other outstanding debt.
KEY RATING DRIVERS
Mid-2x Leverage by 2018: Rogers' credit profile remains weak with leverage beyond current rating guidance at the end of the third quarter 2016 at approximately 3.0 times (x). However, Rogers is committed to a de-leveraging path back to the 2.5x range. Fitch's view is supported by the company's diversified revenue base, strong profitability and improved trajectory in its core Internet and wireless segments, expectations for material free cash flow (FCF) generation and the maintenance of a financial policy focused on debt repayment. Rogers' recent deferral of a dividend increase for 2016 demonstrates that commitment.
Consequently, Fitch expects leverage to improve during the next couple of years by an approximate .2x turn per year driven by debt reduction and EBITDA growth with leverage less than 3x for 2016. Fitch's forecast of a persistently elevated leverage until 2018 significantly constrains rating headroom for any material M&A, spectrum acquisitions or step-ups in shareholder distributions, including dividend and share repurchases that causes Rogers to deviate from Fitch's expectations for leverage reduction to the mid 2x range by 2018.
Commitment to Rating: A key aspect to Fitch's current view reflects 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 full alignment and will demonstrate a consistency in its financial policy toward prioritizing debt reduction. Furthermore, Fitch views the Rogers' family control as a credit positive that serves as an underlying anchor with a long-term investment horizon.
Non-Core Asset Sales: Proceeds from non-core asset sales could accelerate deleveraging benefits, primarily related to Rogers' approximate $1 billion stake in Cogeco. However, Fitch does not include a sale of Cogeco shares in its forecast as a potential sale is highly speculative and uncertain in timing.
Good Asset Mix: 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 completed several strategic transactions in the past couple of years to secure additional spectrum capacity and long-term rights for highly valued sports content.
Stable Profitability: 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 (37% and 29% respectively in the latest 12 month [LTM] period). The strength of Rogers' operating margins is a good indicator of the company's ability to effectively manage challenges from competition, regulation and technology risk. Fitch views the largest factors outside the company's control of macroeconomic and regulatory as relatively benign with limited downside risks over the rating horizon as Rogers has relatively modest exposure in the oil and gas regions in Canada.
YTD Performance Improved in Key Areas: Both the wireless and cable operations have experienced competitive threats that have negatively affected past revenue growth. The expansion and aggressive marketing of IPTV services across Rogers' markets, which is estimated at more than two thirds of its footprint combined with a substandard cable interface relative to its peers, has led to an elevated loss in basic cable subscribers in excess of 100,000 cable subscribers annually in 2014 and 2015. Telephony losses also increased to 60,000 in 2015 versus 14,000 in 2014.
Rogers has improved operating performance in 2016 as the decline in total cable subscriber units has lessened to 63,000 versus 104,000 a year ago during the first nine months. Likewise, phone additions were flat versus a loss of 45,000 as subscribers trends improved across all three cable segments with Internet net additions increasing to 67,000 from 21,000. Despite these pressures, Rogers' higher-margin Internet services have largely offset the video and telephony declines as overall cable revenues were down by one percent year-to-date in 2016 while margins increased by 60 basis points. Fitch expects Rogers' cable results should continue the improvement, supported by Rogers' deployment of 1Gbps Ignite branded Internet service across its footprint that should be complete by the end of 2016.
The Ignite brand that fosters increasing consumer adoption of 4K televisions and Roger's new IPTV platform that is expected by year end should strengthen its long-term competitive position. Fitch believes good execution on the new IPTV platform is critical for Rogers' to improve its medium-term revenue growth profile. The enterprise market, in both wireless and wireline, where Rogers has lower share is expected to be an important growth driver.
600 MHz Spectrum Event Risk: Fitch views the potential auction of TV broadcast spectrum as event risk following Industry Canada's decision to reallocate spectrum licences in the 600 MHz band for mobile services following the conclusion of the 600 MHz auction in the U.S. Fitch anticipates a potential Canadian auction would not occur until 2018 at the earliest. Rogers' will likely have strong interest in acquiring 600 MHz band spectrum to add to their robust spectrum portfolio. Considering the elevated leverage, Fitch expects any potential financing plans by Rogers would be consistent with preserving its 'BBB+' rating.
KEY ASSUMPTIONS
Additional key assumptions within Fitch's internally produced rating case for the issuer include:
--Consolidated revenue increases by approximately 2% in 2016 at the midpoint of company guidance of 1% to 3%. For 2017, Fitch forecasts a similar level.
--EBITDA growth of approximately 1% with margin compression of 40 basis points, which is at bottom end of company guidance of 1% to 3%. For 2017, Fitch forecasts similar margins.
--FCF in the range of $600 million to $700 million in 2016 based on capital spending of $2.35 billion (midpoint of company guidance) and reduced interest costs. Cash taxes will increase from 2015 levels but will still benefit from tax losses. Fitch expects FCF will rise moderately beyond 2016 benefitting from lower capital intensity and interest expense.
--Leverage will decrease to between 2.9x-3.0x in 2016, with expectations for leverage trending downward to the mid 2.5x range by 2018.
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:
--Any material M&A, spectrum acquisitions or step-ups in shareholder distributions, including dividend and share repurchases that causes Rogers to deviate from Fitch's expectations for leverage reduction to the mid 2.5x range by 2018;
--Rogers does not execute on current operational initiatives resulting in lower revenue growth and margin erosion due to competitive pressures resulting in a failure to delever as expected.
Solid Financial Flexibility and Liquidity: Rogers is well positioned from a liquidity perspective through undrawn capacity on its credit facilities, accounts receivable program and FCF generation. Rogers generated approximately CAD550 million in FCF (FCF defined as cash from operations less capital spending less dividends) during the LTM period. For 2016, Fitch expects FCF in the range of $600 million to $700 million. FCF should rise moderately beyond 2016 benefitting from lower capital intensity, core operational improvements and a decrease in interest expense.
Rogers CAD2.5 billion revolving credit facility matures in September 2020. In addition, Rogers has a CAD1.0 billion term credit facility maturing in April 2018 with no scheduled principal payments prior to maturity. As of Sept. 30, 2016, Rogers had $2.5 billion outstanding under the revolving and non-revolving credit facilities. The CAD1.05 billion accounts receivable program that matures in January 2019 was fully drawn at the end of the third quarter 2016. Maturities for the next two years include CAD750 million in 2017 and US1.4 billion in 2018.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating to Rogers:
--Benchmark-sized senior unsecured notes due 2026 rated 'BBB+'.
Fitch currently rates Rogers as follows:
--Issuer Default Rating (IDR) 'BBB+';
--Senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
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.
Date of Relevant Committee: May 17, 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014165
Endorsement Policy
https://www.fitchratings.com/regulatory
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