DBRS Upgrades Shaw Communications to BBB, Stable Trend

DBRS has today upgraded its rating of Shaw Communications Inc. (Shaw or the Company) to BBB from BBB (low). The trend is Stable. Shaw’s previous BBB (low) rating had carried a Positive trend since March 2008. This rating action and the resulting BBB rating are supported by further improvement in Shaw’s overall credit risk profile, including continued growth in cash flow from operations and lower leverage.

Specifically, Shaw continues to operationally leverage its cable network in western Canada to drive EBITDA growth while maintaining EBITDA margins in the upper 40% range –remaining among the highest cable margins in North America. Shaw’s EBITDA growth continues to be driven by subscriber growth in all of its services, including digital, telephony, high-speed Internet and its most mature service, video. Shaw continues to witness high-speed Internet subscriber growth, while having a strong penetration rate of over 70% (of basic subscribers).

Shaw’s subscriber growth has strengthened its competitive position by increasing average revenue per user (ARPU; now over $90 per subscriber per month) and lowering subscriber turnover (churn). Recently, Shaw has been more aggressively growing its digital subscriber base as it introduced a set-top box leasing program early in F2009 to further strengthen its competitiveness in video services. In addition, Shaw’s satellite operations (DTH, recently re-branded Shaw Direct, and business services) continue to drive reasonable EBITDA growth and stable margins in the mid-30% range.

Shaw also continues to invest in its cable network, including its DOCSIS 3.0 deployment, which began in F2009 and will continue across its network into F2010. This deployment has given Shaw greater capacity in its high-speed Internet services, along with additional capacity to add more HD channels. It will also increase its position relative to the telcos that are boosting their broadband capability to offer enhanced data along with video services. In view of these factors, DBRS expects Shaw to report continued EBITDA growth for F2009 (to roughly $1.6 billion) and further growth in F2010.

From a financial perspective, DBRS notes that Shaw continues to generate cash flow from operations, which, along with net operating losses that generate cash tax savings, is sufficient to cover its capex levels and high dividend payout. Capex levels have increased with its digital set-top box leasing program, other variable consumer premise equipment and network upgrades (including its DOCSIS 3.0 deployment). DBRS believes that these investments should propel further growth in cash flow from operations and modest levels of free cash flow in the future once cash tax savings are fully utilized and as capex levels return to below 20% of revenue.

DBRS notes that despite purchasing some wireless spectrum in 2008 for nearly $190 million, Shaw currently has no plans to pursue a wireless network deployment. DBRS considers this approach prudent at this stage, given the competitive nature of the wireless business in Canada and with Shaw’s capex being directed at growth in cable and satellite services.

Furthermore, DBRS notes that Shaw’s recent offer to purchase three conventional broadcast channels from CTVglobemedia Inc., each for a nominal amount of one dollar, does not affect Shaw’s credit profile. However, DBRS notes that this is part of a larger issue between the broadcast companies and the cable and satellite television distributors in Canada. While it is possible that the regulator will award the broadcasters some form of fee-for-carriage to help support their business models, the impact on Shaw could be nominal should it pass these costs onto its subscribers.

DBRS expects leverage to remain relatively stable for the remainder of F2009, with cash flow-to-debt at just under 0.30 times and gross debt-to-EBITDA remaining below 2.5 times. In F2010, these metrics should continue to improve, with cash flow-to-debt expected to exceed 0.30 times and gross debt-to-EBITDA to improve to the lower end of the 2.0-to-2.5 times range. These credit metrics are healthy for a cable operator.

Finally, DBRS believes that with nearly $1.0 billion available, Shaw has sufficient liquidity, and it has begun to proactively refinance its over $1.0 billion of F2010 and F2011 debt maturities with its recent notes issue ($600 million). Proceeds from this notes issue helped to repay some bank debt, redeem its Videon debenture early and pre-finance a portion of its 2010 maturities. DBRS would expect Shaw to refinance a portion of its remaining upcoming maturities with additional notes, although should it not do so, its credit facility (which matures in May 2012) provides sufficient liquidity for the next couple of years.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Cable, which can be found on our website under Methodologies.

This is a Corporate (Cable & Satellite) rating.