DBRS Morningstar Confirms Rogers Communications Inc. at BBB (high) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes rating of Rogers Communications Inc. (Rogers or the Company) at BBB (high). All trends remain Stable. The ratings confirmations acknowledge the impact to Roger’s 2020 financial results from the Coronavirus Disease (COVID-19) pandemic; the lower-than-anticipated capital expenditures (capex) that helped to increase free cash flow (FCF); and the Company’s decision to raise debt in order to enhance liquidity, which raised gross leverage but resulted in only a modest increase in net leverage. The utility-like nature of the Company’s wireless and wireline services and benefits of a diversified operating entity were illustrated in 2020 and are expected to support a rebound in Rogers’s earnings and financial performance in 2021 as coronavirus restrictions ease and vaccine programs become more widespread. The ratings are supported by the Company’s role as a leading wireless and cable TV operator in Canada, increasing revenue diversification and solid free cash-generating capacity. The ratings also consider intensifying competition, evolving consumer habits that negatively affect the cable TV and telephony businesses, and risks associated with regulatory change.

While Rogers’s 2020 consolidated operating profit of $5.9 billion (-5.7% year over year (YOY)) was below DBRS Morningstar’s forecast of $6.2 billion (-1.0% YOY), performance improved materially in the second half of the year and Q4 2020 operating trends appear poised to deliver continued positive results in 2021 despite the lingering impact of pandemic-related restrictions and a slower-than-expected national vaccine rollout. Consolidated revenue of $13.9 billion (-8% YOY) was materially affected by the Wireless segment results, which saw both service and equipment revenue pressure. Although constituting only ~13% of consolidated revenue, Media segment results were also weak (-23% YOY) and Cable was flat, reflecting the Company’s Connected Home focus and success with the Ignite TV brand in the marketplace.

Roger’s Wireless segment business experienced a decline in both Service revenue (-8.1% YOY) and Equipment revenue (-6.8% YOY), resulting in a segment revenue of $8.53 billion (-7.8% YOY). DBRS Morningstar had expected a modest YOY revenue decline in 2020; however, coronavirus-related measures taken by the company (such as waiving certain service fees for a limited period and conforming to stay-at-home restrictions at retail locations) adversely affected the full-year results. Despite the challenges of 2020, Rogers posted an increase of 245,000 net postpaid subscriber additions in F2020, with 114,000 of those (approximately 47%) coming in Q4 2020 alone. Although prepaid net subscribers declined in 2020 (a loss of 142,000), churn in both postpaid and prepaid was down YOY. Blended average billing per user (ABPU) was $63.24 in 2020 compared with $66.23 in 2019 (-4.5% YOY), reflecting the decline in service revenue (primarily roaming and overage fees) and retail store closures, which account for approximately 90% of mobile device sales. Revenue performance in the Wireline segment was flat YOY at $3.95 billion, as a 0.8% increase in subscribers was offset by waiving certain Wireline service fees for a period of time such as long-distance calling and a premium television channels. Media revenue was down materially to $1.6 billion (-23% YOY), primarily driven by a loss in sports-related advertising revenue caused by cancelled and/or the delayed start of major sports leagues.

Despite the decline in revenue, consolidated EBITDA margins improved by 90 basis points (bps) YOY to 42.1% with margin expansion in both the Wireless and the Wireline segments as an increase in mobile device financing, lower wireless churn, and the implementation of cost efficiencies. Partially offsetting positive margin leverage in Wireless and Wireline was Media, where the 2020 EBITDA margin declined by 360 bps to 3.2% from 6.8% previously. While the EBITDA margin was up YOY, consolidated EBITDA declined by 5.7% YOY to $5.86 billion in F2020.

Amid a challenging operating environment in which the coronavirus pandemic created consumer and economic uncertainty, Roger’s financial metrics softened in 2020. Cash flow from operations of $4.65 billion declined 6.7% YOY but was more than sufficient to fund the Company’s capex program ($2.31 billion) and cash dividend payments ($1.01 billion). FCF after dividends but before changes in working capital was $1.33 billion in F2020 compared with $1.17 billion in 2019 (+14.2%) as capex was down 17.6% YOY. As a result, FCF to debt increased to 6.3% in 2020 compared with 5.8% in 2019. For 2020, gross debt-to-EBITDA was 3.63 times (x) compared with 3.21x in 2019. The increase in gross leverage reflected an increase in lease-adjusted gross debt and a decrease in EBITDA; however, Rogers also ended 2020 with $2.48 billion in cash compared with $494 million in 2019 as the majority of incremental debt was held on the balance sheet to increase liquidity amid the uncertainty surrounding the coronavirus pandemic. As a result, Rogers reported a 2020 year-end debt leverage ratio of 3.0x compared with 2.9x in 2019. Rogers ended 2020 with $2.48 billion in cash and equivalents and $3.17 billion available under the Company’s credit facility and receivables securitization programs, combining to provide $5.65 billion in liquidity. DBRS Morningstar notes that Rogers has $1.45 billion of 5.34% senior unsecured debt that matures on March 22, 2021.

Over the near to medium term, DBRS Morningstar expects Roger’s earnings to benefit from the relaxation in coronavirus-related restrictions as 2021 progresses despite the slow initial rollout of vaccines to the Canadian public. As a result, DBRS Morningstar expects Wireless Service and Equipment revenue growth to accelerate in H2 2021 as the Company anniversaries overage fee headwinds and faces easy annual comparables. The Wireline segment should continue to benefit from the solid subscriber trends seen in Q4 2020 related to a solid Ignite TV and Internet offering and the ability to bundle with a highly competitive wireless offering. DBRS Morningstar also expects Media operating performance to continue to improve through 2021 as major sports resume. In F2021, DBRS Morningstar expects Rogers’s revenue to grow in the low- to mid-single-digits to between $14.3 billion and $14.4 billion and increase to about $14.8 billion in F2022 with low-to-mid single-digit revenue growth in Wireless, low-single digit growth in Wireline, and double-digit growth in Media. DBRS Morningstar expects the consolidated EBITDA margin to decline modestly YOY, largely reflecting the impact of Wireless loading accelerating and promotion activity moving towards historical norms. Despite the expectation of margin pressure, DBRS Morningstar expects consolidated EBITDA to increase in the low- to mid-single-digit range, with Wireless up in the mid-single digits, Wireline essentially flat, and double-digit growth in Media. As such, DBRS Morningstar expects consolidated EBITDA to increase to $5.9 billion to $6.0 billion in 2021 and toward $6.3 billion in 2022.

DBRS Morningstar expects Rogers’ financial profile to remain supportive of the current rating level, which incorporates a higher level of capital investment and spectrum acquisition over the next several years, steady growth in operating cash flow, and EBITDA growth rather than debt reduction. In 2021, DBRS Morningstar expects capex spending to increase to approximately 17.5% (excluding spectrum licenses) in terms of capital intensity compared with 16.6% in 2020. DBRS Morningstar expects FCF (after dividend payments, but before working capital changes) to exceed $800 million in 2021 and increase to over $900 million in 2022, implying FCF to debt in the mid-single-digit range for 2021 and 2022. If the Company elects to keep considerably more cash on hand than previously expected in order to provide incremental financial flexibility over the near term, then deleveraging towards 2.5x would be over a longer timeframe then initially contemplated (i.e., towards the latter part of DBRS Morningstar’s four year forecast horizon rather than the earlier half). Cash generation should improve over DBRS Morningstar’s investment horizon, which should support continued 5G networks buildout and spectrum license auctions in 2021–23. Rogers has $5.7 billion of liquidity available as of year-end 2020, which is sufficient to fund upcoming debt maturities of $1.45 billion 5.34% senior unsecured notes and 3500-megahertz-spectrum license purchases. DBRS Morningstar also notes that after Rogers/Altice USA’s failed bid to acquire Cogeco Communications Inc. (rated BB (high) with a Stable trend by DBRS Morningstar), DBRS Morningstar expects the Company to review its capital allocation priorities. The review may result in the sale of its Cogeco stake, valued at approximately $1.8 billion pretax, which could provide additional financial flexibility to the Company.

DBRS Morningstar does not anticipate a change in Rogers’ ratings over the near to medium term. However, if the Company achieved a substantial increase in its Wireless and Wireline market share, which resulted in a commensurate growth in the Company’s earnings profile, materially grew its cash-generating ability, and the regulatory environment became highly supportive, a rating upgrade may occur. Conversely, if despite the utility-like nature of the industry, the Company is unable to drive Wireless market share and profitability, fail to capitalize on operating in a 5G environment, and/or there is a material deterioration in Wireline operating performance (which could reflect regulatory actions) in addition to a sustainable rise in leverage, a negative rating action may occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Communications Industry (July 30, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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