DBRS Comments on the Government of Canada’s Rejection of Manitoba Telecom Services Inc.’s Allstream Sale

DBRS notes that on October 7, 2013, the Government of Canada rejected Manitoba Telecom Services Inc.’s (MTS or the Company; rated BBB with a Stable trend by DBRS) sale of Allstream due to national security concerns. On May 27, 2013, DBRS confirmed MTS’s ratings following the Company’s announcement to sell Allstream. The confirmation was based on MTS’s renewed focus as a pure-play telecom provider with more predictable operating results and stronger free cash flow generating capacity. DBRS noted that, although the Company’s leverage after the sale was expected to increase moderately as the loss of operating income from Allstream would not be fully offset by debt reduction, MTS’s gross debt-to-EBITDA ratio was not expected to rise above the 2.0 times level.

DBRS assumes that MTS will now continue to operate Allstream for the foreseeable future. If Allstream’s operations remain on track, DBRS expects MTS to maintain credit metrics in line with current levels. DBRS will continue to monitor management’s business strategy and financial management intentions (including the financing of pension funding requirements) as they evolve.

MTS’s ratings are based on the incumbent division’s steady operating performance and a relatively stable financial profile, while acknowledging the potential for moderate debt financing in regards to prospective investment in spectrum at the upcoming auction. The ratings also reflect the steady erosion of local access lines, a mature Allstream division, intensifying competition across all segments and the Company’s concentration in a smaller market with limited growth prospects. As DBRS believes the Company’s ratings are currently positioned at the mid-to-low end of their respective rating categories, weaker-than-expected operating performance and/or a significant increase in leverage could place pressure on MTS’s current ratings.

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