DBRS Downgrades TELUS to BBB (high), R-2 (high), Stable Trends

DBRS Limited (DBRS) has today downgraded TELUS Corporation’s (TELUS or the Company) Issuer Rating and Notes ratings to BBB (high) from A (low) and the Company’s Commercial Paper rating to R-2 (high) from R-1 (low). The trends are Stable. This action follows the Company’s change in financial management guideline. As part of a broader plan to improve its cost of capital and return value to shareholders, the Company has revised its long-term financial leverage policy and now intends to target a net debt-to-EBITDA ratio of 2.0 times (x) to 2.5x from 1.5x to 2.0x prior.

On March 19, 2015, DBRS placed TELUS’s ratings Under Review with Negative Implications following the Company’s announcement that it had secured 15 megahertz of AWS-3 (advanced wireless services) spectrum for $1.5 billion. While DBRS recognized the importance of investing sufficiently in spectrum over the long term, the rating action at that time reflected DBRS’s concern that the debt-financed investment will weaken the financial risk profile of TELUS well beyond its previously stated policy range (net debt-to-EBITDA of 1.5x to 2.0x) and beyond levels appropriate for the rating categories at that time.

The downgrade reflects DBRS’s view that the Company’s revised target net debt-to-EBITDA ratio of up to 2.5x results in a credit risk profile that is no longer consistent with the A (low) rating category, particularly given DBRS’s estimate that TELUS would be above, or close to, debt-to-EBITDA of 2.5x from the end of 2015 through to 2017. As such, DBRS believes TELUS is better positioned in the revised rating category to use its operating cash flow and raise incremental debt to fund its capital investment (including spectrum purchases) and returns to shareholders over the near to medium term.

DBRS considers TELUS to now be at the high end of the BBB (high) rating category. The ratings and the Stable trends reflect the Company’s solid business profile, including its well-entrenched market position and strong cash-generating capacity and coverage ratios. DBRS expects TELUS will continue to perform well operationally and deliver mid-single-digit growth in EBITDA to approximately $4.4 billion in 2015, based on the Company’s growing subscriber bases across both wireless and wireline, increasing revenues per user and ongoing network expansion. In terms of financial leverage, DBRS believes debt-to-EBITDA of up to 2.75x would be commensurate with the current rating category.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Communications Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.