DBRS Confirms Rogers Communications Inc. at BBB, Stable Trend

DBRS has today confirmed Rogers Communications Inc.’s (RCI or the Company) BBB rating with a Stable trend. The rating continues to be supported by the Company’s position as a leading wireless carrier and cable operator in Canada. The rating also reflects the intensifying competitive landscape in both industry segments as it becomes more challenging to grow subscribers while maintaining revenues per user. DBRS’ confirmation acknowledges mounting pressure on operating metrics and top-line growth in recent periods, balanced by the fact that key credit metrics remain reasonable for the current rating category.

RCI’s wireless revenue increased by 2.4% to $7.1 billion in 2011 and remained relatively flat year over year in H1 2012. Revenue growth slowed from mid-single digit increases in recent years, primarily due to falling average revenue per user (ARPU) and a deceleration of net wireless additions in contrast to industry trends. EBITDA margins declined 300 basis points (bps) to 42.5% in 2011 due to pressure on top-line sales and increasing costs related to handset subsidies. Margins recovered partially in H1 2012 due to aggressive cost reductions. Cable revenue remained flat at $3.8 billion in 2011, representing a slowdown from historical high-single digit growth rates. Cable revenues in H1 2012 also remained relatively flat over the same period in 2012. The recent trend of lower growth rates are based on a deceleration of subscriber growth likely attributable to the roll out and expansion of Bell Canada’s Fibe TV offering. In terms of EBITDA margins, the Cable segment has remained fairly stable.

Turning to the Company’s financial profile, cash flow from operations continued to track operating income, while capex and dividends increased moderately, resulting in a decline in 2011 free cash flow (before changes in working capital) to $375 million from $595 million a year earlier. RCI used its free cash flow and incremental debt of approximately $970 million to finance its acquisition of Atria Networks and to complete share repurchases. The increase in total debt balance to $10.6 billion at the end of 2011 resulted in debt-to-EBITDA of 2.25x compared to 2.07x a year earlier.

Going forward, DBRS expects it will be more challenging for RCI to grow its subscriber base in wireless and cable while maintaining ARPU levels. Taking this into account, DBRS forecasts revenues will increase modestly to the $12.5 billion to $12.7 billion range in 2012. Within the Wireless segment, top-line growth should be driven by moderate increases in wireless subscribers. The Cable segment’s revenues are expected to remain flat as nominal price increases are expected to be counterbalanced by plateauing subscriber levels. DBRS expects EBITDA margins in 2012 to decline slightly as the Company experiences ARPU and handset cost pressures within its Wireless segment. This should result in consolidated EBITDA in the $4.7 billion to $4.8 billion range in 2012. DBRS believes RCI will likely focus on increasing market share to rejuvenate subscriber growth and also concentrate on efficiency and scalable benefits to adapt to the decreasing price environment.

In terms of financial profile, DBRS expects RCI to remain fairly stable on the strength of its cash flow generating capacity. Cash flow from operations should continue to track operating income and remain fairly steady (i.e., $3.2 billion to $3.4 billion in 2012). Capex requirements are expected to increase modestly to the $2.1 billion to $2.2 billion range as the Company invests in wireless capacity upgrades and the construction of its new LTE network. Dividends policy is expected to remain consistent and result in a steady increase in cash outflow from the prior year. As such, DBRS forecasts the Company will generate nominally positive free cash flow before changes in working capital in 2012. DBRS believes RCI may use any free cash flow and some incremental debt to undertake further share repurchases, while attempting to maintain credit metrics within a range consistent with the current rating category. Despite the resilience of the credit, it should be noted that material deterioration in credit metrics resulting from significantly weaker than expected operating performance and/or meaningfully more aggressive than expected financial management could result in pressure on the rating.

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

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

The applicable methodologies are Rating the Communications Industry, Rating the Newspaper and Magazine Publishing Industry, Rating the Radio Broadcast Industry and Rating the Television Broadcasting Industry, which can be found on our website under Methodologies.