Fitch Rates TELUS's Senior Unsecured Notes Offering 'BBB+'; Outlook Stable
Net proceeds are expected to be used to repay outstanding commercial paper with the remaining balance to be used for general corporate purposes.
TELUS' Issuer Default Rating (IDR) is currently 'BBB+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Strong Position in a Competitive Market: TELUS Corporation's (TELUS) ratings reflect the stability of the company's diversified operations, its position as one of the three principal national wireless operators in the Canadian market and its leading market position as a local wireline operator in western Canada and eastern Quebec.
Growing Wireless and Wireline Data Revenues: Fitch believes the rating is supported by the continued strong performance of the wireless business, which generates solid growth in revenues, EBITDA and simple free cash flow (FCF; EBITDA less capital spending). Wireline results have also been solid, as TELUS has experienced consistent wireline revenue growth since 2011.
Gross Leverage: Gross leverage for the latest 12 months (LTM) period ending June 30, 2016, was 2.7x, up from 2.2x at end-2014. The primary cause of the rise was the acquisition of spectrum in 2014 and 2015, a key resource that is largely only available to TELUS through the auction process. Fitch believes moderate EBITDA growth will provide the company with the flexibility to manage net leverage within its 2.0x to 2.5x target range over the longer term. However, Fitch does not expect TELUS to get back within this range until early 2018.
Stock Repurchases: Continued stock repurchases have contributed to the rise in leverage; a total of CAD628 million of repurchases were made in 2015, following CAD612 million in repurchases in 2014. In May 2016, TELUS announced its intention to renew its normal course issuer bid (NCIB) program in each year of the next three years in order to permit purchases for up to $250 million in each such calendar year. The NCIB will be more discretionary in nature than the previous NCIB.
TELUS International (TI): In June 2016, TELUS completed the sale of a noncontrolling 35% interest in TI to Baring Private Equity Asia, valuing the business at CAD1.2 billion. TELUS received approximately CAD600 million from the transaction including proceeds from incremental debt within TI. In total, TI has a CAD425 million nonrecourse financing (Fitch will include this debt within TELUS's consolidated debt) secured by TI's assets. TELUS will use the proceeds to invest in its wireless and wireline networks.
FCF and Capital Spending: TELUS's guidance for 2016 capital spending is CAD2.85 billion, about a 11% increase over 2015 levels. Fitch expects FCF to be negative in 2016, in the range of CAD250 million to CAD300 million.
--Fitch's base case forecast assumes a 10% dividend increase in 2016, the last year of its multi-year 2014-2016 dividend strategy. Fitch's existing assumptions reflect more moderate dividend increases after 2016 (5% per annum). Fitch's existing assumptions did not reflect the sale of TI or a modest level share repurchases as have occurred under a new NCIB.
--Fitch assumes consolidated revenue grows 2.45% in 2016, just below the midpoint of the company guidance of 2.2% to 3% in 2016. A similar level is projected for 2017. The lower growth rates than historical reflect the slow economy in Canada, particularly in energy and resource intensive areas of its service territory (Alberta), as well as wireless competition.
--Fitch expects the EBITDA margin to improve owing to efficiency initiatives. In addition, slower growth in the wireless area can lead to higher margins as fewer subsidized handsets are sold, although this effect could be somewhat muted by retention initiatives (which are expected to moderate in 2016 as the coterminous contract issues ameliorate). Restructuring costs are excluded from EBITDA but are included in non-operating cash flow as projected (CAD175 million total).
--Cash taxes in 2016 are expected to increase over 2015 before declining in 2017. The use of Public Mobile losses in 2014 enabled the deferment of a portion of 2015 taxes until 2016 and leads to the increase in relative instalments payable. The effects go away in 2017, reducing cash payments by approximately CAD150 million relative to 2016.
Positive Rating Action: The rating could be upgraded if the company committed to maintaining gross leverage at a level lower than anticipated, i. e. in the range of 1.5x to 1.7x, along with continued strong wireless operating performance and stable wireline performance.
Negative Rating Action: A negative rating action could be prompted by sustained gross leverage of 2.5x or higher due to a combination of acquisitions, spectrum purchases and stock repurchases in the absence of a credible deleveraging plan. In addition, operating profit declines owing to greater-than-anticipated competition could lead to a negative action if a return to stability is uncertain.
Strong Liquidity: TELUS's financial flexibility is good, owing to its cash and temporary investments, undrawn revolver capacity, commercial paper program and accounts receivable securitization program. Cash and temporary investments amounted to CAD428 million at June 30, 2016. TELUS maintains a CAD2.25 billion revolving credit facility maturing in May 2021. The financial ratio covenants in the credit facility restrict net debt/operating cash flow to no more than 4x and operating cash flow/interest expense of no less than 2x. The revolver backstops TELUS's CAD1.4 billion commercial paper program, which had CAD975 million outstanding at June 30, 2016. Consequently, the CAD2.25 billion revolving facility had CAD1.27 billion in net availability. Commercial paper is denominated in U. S. dollars.
The company's CAD500 million accounts receivable securitization program matures in December 2018, and TELUS had CAD100 million outstanding on June 30, 2016, flat with the amount outstanding at the end of 2015. The program contains a trigger clause, which would unwind the program if TELUS Communications Inc. is rated below 'BB' by a Canadian rating agency, though Fitch believes this is unlikely given its current rating level.
Near-term maturities are manageable at CAD700 million in 2017.