DBRS Confirms Rogers at BBB, Trend Stable

DBRS has today confirmed the rating on the Senior Unsecured Notes of Rogers Communications Inc. (RCI or the Company) at BBB. The trend is Stable. The confirmation of RCI’s rating reflects: (1) strong cash flow from operations generated by the Company as a whole, especially from the wireless segment, even factoring in the likely impact of tougher competition in this market going forward; and (2) a reasonable financial risk profile and credit metrics, as well as ample liquidity and a manageable maturity profile. DBRS’s rating on RCI’s Senior Subordinated Notes has been discontinued, as the subordinated notes have been repaid.

From a business risk perspective, DBRS notes that RCI has a high level of EBITDA concentration in its wireless segment (70% of total EBITDA), which exposes it to risk resulting from potential changes in the competitive wireless market in Canada. The advent of new competition, along with possible changes to foreign ownership restrictions (especially for new wireless entrants), may preclude DBRS from considering positive rating action for RCI in the near term, at least until the full impact of changes in the industry has been determined.

However, DBRS notes that the impact of the new entrants alone is not expected to cause a drastic decline in RCI’s EBITDA. Rather, it could put some pressure on EBITDA growth and EBITDA margins in the future as pricing pressure intensifies and the Company becomes more aggressive in its customer retention efforts. DBRS notes that if the new competitors (which are currently unable to match RCI’s national and in-market coverage) compete solely on price (as has been the case thus far), RCI does have flexibility with its Fido brand to compete for price-sensitive subscribers.

Furthermore, RCI will continue to invest in its high-speed packet access (HSPA) network to offer better and faster mobile voice and data services. This should help to offset voice pricing pressure and increase its operating leverage. The rise in popularity of smart phones and the trend toward data-hungry applications – paired with the demand for high-quality content – offers significant growth opportunities in the wireless segment. DBRS notes that RCI’s two national competitors, Bell Canada/BCE Inc. and TELUS Corporation, have also deployed HSPA networks, which, along with the arrival of the new competitors, has reduced RCI’s exclusivity in Canada in terms of operating GSM/HSPA networks.

DBRS expects RCI’s cable business to remain stable within a competitive industry. RCI’s technological improvements to its networks, such as pushing fibre closer to the nodes and implementing DOCSIS 3.0 technology, keep it in a strong position to support increasing demand for ever-higher data speeds and better video services. EBITDA margins for the segment remain healthy, in the upper 30% range (excluding its video retail stores). Going forward, DBRS expects incremental video competition from the telcos as they expand their terrestrial-based video services as part of their communications bundles. RCI is expected to counter this with increased investment in its network and by beginning to integrate its service (between cable, wireless and high-speed Internet) to make its product offerings stickier.

Finally, DBRS notes that the Company’s Media segment has seen an increase in revenues in Q1 2010 – the first time since the economic downturn began in late 2008. Year-over-year growth reflects improvements in Media’s prime-time TV ratings and increased subscriber fees. DBRS expects a strengthening in the economy and stronger consumer discretionary spending to have further favourable impacts on revenues from Television, Sportsnet and The Shopping Channel.

From a financial perspective, DBRS notes that RCI continues to generate ample cash flow from operations to cover its capex and rising dividends (recently increased to $1.28 per share on an annual basis). Including cash tax savings (with full cash taxes not expected until 2012), RCI’s free cash flow of around $1 billion gives it ample ability to fund small acquisitions and share repurchases. DBRS believes that RCI will manage its free cash flow prudently, with excess funds likely directed toward share repurchases and small acquisitions while its dividend payout remains tied to its cash flow from operations growth.

Furthermore, DBRS believes that RCI remains committed to its formal leverage target range of 2.0 to 2.5 times net debt-to-EBITDA (currently at the lower end, at 2.04 times), which, along with cash flow-to-debt of 0.34 times and EBITDA interest coverage of nearly 7.0 times, helps to underscore RCI’s commitment to maintaining an investment-grade rating.

While RCI has no debt maturities for the remainder of 2010, it does have a steady amount of debt coming due in the 2011-2013 time frame. This will likely lead to some level of refinancing activity in the public debt markets. DBRS notes that RCI issued $1 billion of notes in Q3 2009, with the proceeds used to repay drawings under its credit facility and for general corporate purposes.

Overall, DBRS believes that RCI’s rating is well placed at the current level, given its reasonable financial risk profile and relatively stable business risk profile, despite increased competition in wireless and cable. While not ruling out possible rating improvement in the future, DBRS plans to assess the impact of additional wireless competition on RCI as it develops over the medium term, along with the Company’s track record of financial discipline, before any rating action is considered.

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

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

This is a Corporate rating.