DBRS Confirms Rogers Communications Inc. at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Notes rating of Rogers Communications Inc.’s (Rogers or the Company) at BBB with Stable trends. Rogers’ earnings profile remains reasonable for the current rating category despite the pressure on profitability from intensifying competition and structural trends in the wireless and cable segments. The ratings continue to be supported by the Company’s position as a leading wireless and cable operator in Canada and the increasing diversification of its business lines.

Consolidated revenues increased by 1.1% to $12.8 billion in 2014, supported by the initial National Hockey League licensing revenues and partially offset by re-priced international roaming plans and weak subscriber metrics. Adjusted EBITDA grew by 1.5% to $5.0 billion in 2014, as growth in wireless was almost offset by declines in cable and media segments. DBRS notes that in 2014, there were significant management changes, along with the introduction of a new strategy, Rogers 3.0. H1 2015 revenues increased +5.6% year over year, driven by solid gains in the media segment and initiatives related to the new strategy. Rogers’ leverage has increased considerably since the beginning of 2014, as expected, as a result of debt financing related to spectrum purchases and a number of smaller acquisitions. Gross debt-to-LTM EBITDA climbed to 3.41 times (x) as at June 30, 2015, from 2.85x in 2013.

DBRS expects pressure on Rogers’ profitability to continue; however, the earnings profile should remain sufficient for the rating over the near to medium term. DBRS forecasts revenues to increase to between $13.2 billion and $13.4 billion in 2015, driven primarily by growth in wireless and media segments. Adjusted EBITDA margins in the wireless and cable segments should decline somewhat, as equipment costs, retention spending and customer incentives are expected to rise. As such, DBRS expects adjusted EBITDA to remain essentially flat, ranging between $4.9 billion and $5.1 billion in 2015. The implementation of the Rogers 3.0 strategy, which includes increased pricing discipline, could result in increased volatility in subscriber metrics over the near term in both the wireless and cable segments, as the Company prioritizes value customers over volume. DBRS believes that the effective implementation of Rogers’ strategy is critical to achieving growth in operating income, particularly in the face of intensifying competition, and changing regulation and consumer trends.

DBRS expects Rogers’ financial profile to remain adequate for the rating, based primarily on its cash generating capacity and an expected decrease in leverage over the medium term. Cash flow from operations should rise to approximately $3.8 billion to $3.9 billion in 2015, supported by the tax carry-forwards from the Mobilicity transaction. Capex is expected to remain in the $2.4 billion range, and dividends are expected to increase to approximately $980 million. As such, DBRS forecasts that Rogers should generate $400 million to $600 million of free cash flow in 2015, which is expected to be used to fund tactical acquisitions and repay debt. DBRS believes that Rogers’ net debt to EBITDA target of below 2.5x will be difficult to achieve based on the expectation of flat operating income and the magnitude of free cash flow available for debt reduction. That said, DBRS believes debt-to-EBITDA of up to 3.5x is sufficient for 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.

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

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

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.