DBRS Confirms Manitoba Telecom Services Inc. at BBB and R-2 (high), Stable Trends, Following Sale of Allstream

DBRS has today confirmed Manitoba Telecom Services Inc.’s (MTS or the Company) Issuer Rating and Medium-Term Notes rating at BBB and its Commercial Paper rating at R-2 (high). The trends remain Stable. The ratings confirmation follows MTS’s announcement that it has signed a binding agreement to sell its Allstream business to Accelero Capital Holdings S.a.r.l. Group. The deal values Allstream at $520 million, subject to certain customary adjustments, including assumed debt obligations and normalized working capital, as well as certain pension-related obligations. DBRS notes that the closing of this transaction is subject to approval under the Investment Canada Act.

In addition, and as part of this transaction, MTS has agreed to retain the pension obligations and related pension plan assets, in respect of retirees and other former employees of Allstream under Allstream's current defined benefit pension plans. After closing costs, MTS expects to realize net proceeds of approximately $405 million. The Company is expected to use these proceeds to fund an additional $170 million into the MTS and Allstream pension plans and to repay $70 million in short-term indebtedness incurred in February 2013. DBRS notes that MTS will determine its planned use of the remaining transaction proceeds upon its closing.

On December 21, 2012, DBRS stated that it does not view Allstream as core or complimentary to MTS and that it believed Allstream’s divestiture could be neutral to ratings, as long as any potential transaction (including the allocation of consideration received) would result in a pro forma gross leverage ratio (debt-to-EBITDA) close to the 2.0 times level.

The confirmation reflects the fact that although the Company’s leverage after the sale is expected to rise as the loss of operating income from Allstream will not be fully offset by debt reduction, MTS’s gross debt-to-EBITDA ratio would rise to near the 2.0 times level. The confirmation also reflects MTS’s renewed focus as a pure-play telecom provider, with more predictable operating results and stronger free cash flow generating capacity. Lastly, DBRS takes comfort in the improvement of the Company’s liquidity as a result of its decision to allocate a significant portion of the sale proceeds toward funding its pension solvency deficits.

MTS’s ratings reflect the Company’s steady operating performance and stable financial profile, while acknowledging the potential for moderate debt financing in regards to prospective investment in spectrum at the upcoming auction. The ratings continue to be supported by the Company’s incumbent position and steady subscriber base in Manitoba, as MTS is one of the few operators to offer quadruple-play services of voice, wireless, video and data on its own networks. The ratings also reflect the steady erosion of local access lines and intensifying competition across all segments, as well as the Company’s concentration in a smaller market with limited growth prospects.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating the Communications Industry (April 2011), which is available on our website under Methodologies.