Fitch Affirms Rogers at 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Rogers Communications Inc.'s (Rogers) Long-Term Issuer Default Rating (IDR) and unsecured debt ratings at 'BBB+'. The Rating Outlook has been revised to Stable from Negative.
The Outlook revision to Stable reflects Fitch's confidence regarding Rogers' commitment and expected de-leveraging path over the rating horizon. 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 generation and the maintenance of a financial policy focused on debt repayment. Rogers' recent deferral of a dividend increase for 2016 demonstrates that commitment.
KEY RATING DRIVERS
Weak Credit Profile: Rogers' credit profile remains weak with leverage beyond current rating guidance at the end of the first quarter 2016 at approximately 3.2 times (x). Additionally, Rogers' deleveraging back to the 2.5x range will take longer than previously expected. The increase in leverage was driven initially by Rogers' CAD3.3 billion acquisition in 2014 of 700 MHz spectrum, which Fitch believes was critical for the company to strengthen its competitive position. The spectrum deployment of 700 MHz across Rogers' wireless footprint has lessened the need for further capital investment by substantially increasing LTE coverage, capacity and consistency with data speeds.
Stable FCF Generation Expected: Fitch believes Rogers will generate stable levels of FCF in the range of CAD750 - CAD850 million during the next couple of years supported by its core wireless and cable segments, a lessening in capital intensity, an expected reduction in interest costs and a lower level of cash taxes in 2016.
Mid-2x Leverage by 2018: 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.
Non-Core Asset Sales: Proceeds from non-core asset sales could also accelerate deleveraging benefits, primarily related to Rogers approximate CAD1 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.
Commitment to Rating: A key aspect of Rogers' ratings is the company's public commitment to maintaining leverage in the 2.0x to 2.5x range over the longer term. Fitch believes 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.
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 FFO margins (37.5% and 29.6% respectively in 2015). 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.
Competitive Pressures: Both the wireless and cable operations have experienced greater competitive threats that have negatively affected revenue growth. The continued expansion and aggressive marketing of IPTV services across Rogers' markets, which is now 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 the past two years. Telephony losses also increased to 60,000 in 2015 versus 14,000 in 2014. Despite these pressures, Rogers' higher-margin Internet services largely offset this pressure with overall cable revenues flat in 2015 and margins down modestly. Wireless subscriber trends improved during 2015 with Rogers increasing its share of net postpaid additions to 17% compared to 0% in 2014.
Q1'16 Performance Improved in Key Areas: During the first quarter of 2016, the decline in total cable subscriber units lessened to 20,000 versus 48,000 a year ago as subscribers trends improved across all three cable segments with increased Internet revenues for the most part, offsetting lower margin television and telephony revenue declines. Fitch expects Rogers' cable results should continue to improve going forward driven by rapid deployment of 1Gbps Ignite branded Internet service across its footprint that should be completed by the end of 2016.
The Ignite brand combined with increasing consumer adoption of 4K televisions that require higher bandwidth connections and Roger's new IPTV platform that is expected in the latter half of 2016 should enable a marketing advantage within its territories. Fitch believes good execution on the new IPTV platform is critical for Rogers' to strengthen its competitive position and 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.
Additional key assumptions within Fitch's internally produced rating case for the issuer include:
--Consolidated revenue increases by 1.9% in 2016, slightly below 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 $750 million to $825 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 be below the expected long-term run rate. 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.
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 free cash flow (FCF) generation. Rogers generated more than CAD200 million in FCF (FCF defined as cash from operations less capital spending less dividends) during 2015. Fitch's FCF expectations for Rogers in 2016 are in the range of CAD750 million to CAD825 million which should allow material deleveraging. Fitch expects FCF will 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 (recently extended from April 2019). In addition, Rogers has a CAD1 billion term credit facility maturing in April 2018 (recently extended from April 2017) with no scheduled principal payments prior to maturity. As of March 31, 2016, Rogers had CAD2.8 billion available for drawdown under the revolving and non-revolving credit facilities. The CAD1.05 billion accounts receivable program that matures in January 2018 had approximately CAD 1 billion outstanding at the end of the first quarter 2016.
Maturities for the next three years include CAD1 billion in 2016, CAD750 million in 2017 and US1.4 billion in 2018. Fitch expects Rogers will draw down on its credit facilities to repay the CAD1 Billion of maturing debt in 2016, thus reducing interest expense and offering flexibility to repay debt through FCF generation or asset sales.
FULL LIST OF RATING ACTIONS
Fitch affirms Rogers' ratings as follows:
--IDR at 'BBB+';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook has been revised to Stable from Negative.