DBRS Comments on Manitoba Telecom Services Inc.

On May 27, 2013, DBRS confirmed Manitoba Telecom Services Inc.’s (MTS or the Company) Issuer Rating and Medium-Term Notes rating, both at BBB, and its Commercial Paper rating at R-2 (high), with all trends remaining Stable following the Company’s sale of Allstream.

The ratings were confirmed partly because MTS’s gross debt-to-EBITDA ratio would not rise above the 2.0 times (x) level following the closing of the transaction. DBRS also took comfort in the improvement in the Company’s liquidity that resulted from its decision to allocate a significant portion of its Allstream sale proceeds toward funding its pension solvency deficits.

In our June 17, 2013, report, DBRS noted that MTS’s ratings reflect its steady operating performance and stable financial profile, while acknowledging the potential for moderate debt financing for prospective investment in wireless spectrum at the upcoming 700 MHz spectrum auction.

The ratings are currently 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.

Since DBRS’s latest report on MTS, Industry Canada has continued its efforts to foster competition within the Canadian wireless sector. DBRS notes that a viable foreign competitor with strong financial backing choosing to execute a wireless expansion plan in Manitoba would cause the competitive environment to intensify. That said, DBRS questions whether a foreign competitor would choose to enter Manitoba, given the size and location of the market.

However, as DBRS believes the Company’s ratings are currently positioned at the mid to low end of their respective rating categories, it may be possible that such an event would result in a negative rating action for MTS. DBRS will continue to carefully monitor the operating performance and financial management of MTS, particularly in the context of an evolving competitive environment.

Notes:
The applicable methodology is Rating Companies in the Communications Industry, which can be found on our website under Methodologies.