DBRS Confirms Rogers Communications at BBB and BBB (low), Stable Trends

DBRS has today confirmed its ratings on Rogers Communications Inc.’s (RCI) Senior Unsecured Notes and Senior Subordinated Notes at BBB and BBB (low), respectively. The trends are Stable. The confirmation of RCI’s ratings reflects: (1) a stable business risk profile supported by its wireless, cable and media operations (despite some cyclical pressure in its advertising-supported media operations); and (2) a reasonable financial risk profile with credit metrics that are likely to remain stable as it is in the middle of its recently stated target range with good levels of free cash flow, ample liquidity and a manageable debt maturity profile.

From a business risk perspective, DBRS notes that the mix of RCI’s revenue and EBITDA continues to provide it with the benefit of diversification. This includes Wireless and Cable growth, which is expected to more than offset Media’s EBITDA pressure in 2009, a result of the economy’s impact on advertising.

RCI’s Wireless segment continues to drive good levels of EBITDA growth as it balances subscriber growth with higher acquisition costs with a sizable increase in smartphone activations. Growth in subscribers and data services along with stable churn levels helped to offset lower voice ARPU as a result of the economy and competitive factors. As a result, EBITDA margins remain healthy at just under 44%. DBRS expects these trends to continue for Wireless, a segment that generates nearly 70% of RCI’s total EBITDA.

DBRS notes that with new wireless competitors on the horizon (facilitated by the AWS spectrum auction in Canada in 2008) and its two national CDMA competitors overlaying a High Speed Packet Access (HSPA) network, Wireless is preparing for the advent of new competitors on all fronts. Specifically, Wireless is focusing on customer retention, pushing smartphones with multi-year contracts, continuing to invest in its advanced network (HSPA) and ensuring its two brands are competitive. DBRS notes that if the new competitors (who are likely to have thin networks) choose to compete on price, RCI does have flexibility with its Fido brand to compete for price sensitive subscribers. While Wireless could lose some of its exclusivity on handsets and future roaming revenue to its national competitors, DBRS expects this to be gradual as the majority of cross-border and international roaming traffic is on the GSM standard.

RCI’s Cable segment continues to drive reasonable EBITDA growth with its bundling strategy (four services including Wireless) driving higher ARPU levels while keeping its churn levels relatively low. While subscriber growth rates continue to slow and RCI is experiencing some basic subscriber losses due to the economy and competitive factors, its core cable operations drive EBITDA growth and steady EBITDA margins just above the 40% level. This growth continues to offset modest pressure on its business services segment and virtually break-even EBITDA performance in retail stores. These two operations continue to suppress Cable’s consolidated EBITDA margins to around the 32% level.

DBRS expects these trends to continue for Cable over the medium term, with Cable continuing to unlock the inherent operating leverage that its cable network offers. DBRS expects incremental video competition during this timeframe from the telcos as they begin to offer a terrestrial-based video service as part of their bundle. In the meantime, DBRS expects Cable to continue to invest in its network (pushing fibre deeper into its network, DOCSIS 3.0 launch, switched digital video, etc.) to ensure it is competitive with its video, high-speed Internet and telephony services.

Finally, the growth in Wireless and Cable as described above continues to offset pressure on Media’s EBITDA. This pressure is a result of the current economic weakness on its advertising-supported businesses (publishing, radio and television) along with a soft retail environment for The Shopping Channel. These factors outweighed lower costs and revenue growth at Sportsnet and in its Sports Entertainment business (largely The Toronto Blue Jays). RCI continues to add to its Media segment on an opportunistic basis including its recent purchase of Citytv and the remaining stake of OLN that it did not own. RCI continues to consider this segment a core part of its business as it offers the ability to cross-sell its communications services, both in its cable region and nationally.

From a financial perspective, DBRS notes that RCI continues to generate ample cash flow from operations to cover its dividends (recently increased to $1.16 per share on an annual basis), small acquisitions and share repurchases. This free cash flow will continue to be bolstered by cash tax savings for the next few years as RCI utilizes its non-capital tax losses.

DBRS believes that RCI will manage its free cash flow prudently, with excess funds likely directed to small acquisitions and share repurchases while its dividend payout remains tied to its cash flow from operations growth. Furthermore, RCI has recently formalized a leverage target range (2.0-2.5 times net debt to EBITDA), which further underscores its commitment to maintaining investment grade ratings. While RCI has no debt maturities for the remainder of 2009 or 2010, it does have a steady amount of debt due in the 2011-2013 timeframe, with over $1 billion due each year. This will require some level of refinancing activity in the public debt markets. DBRS notes that RCI recently issued $1 billion of notes, with the proceeds to be used to repay drawings under its credit facility and for general corporate purposes.

Overall, DBRS believes that RCI ratings are well placed at the current levels given its diverse and stable business risk profile and reasonable financial risk profile. While not precluded from possible rating improvement in the future, DBRS plans to assess the impact of additional competition as it comes in the medium term along with RCI’s track record of financial discipline.

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

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

This is a Corporate (Wireless) rating.

This rating is based on public information.