Morningstar DBRS Comments on Rogers Communications Inc. Post Announcement of a Proposed Investment; Issuer Rating of BBB (low) Is Unchanged

On October 24, 2024, Rogers Communications Inc. (Rogers or the Company, rated BBB (low) with a Stable trend) announced that it had secured a nonbinding term sheet with a global financial investor for a $7.0 billion minority interest investment. DBRS Limited (Morningstar DBRS) views the Rogers announcement as credit positive.

The Transaction
Rogers plans to sell a portion of its national wireless backhaul data transport network (i.e., the segment of the network that connects wireless towers to the core network), for $7.0 billion (the Transaction) to a global financial investor (the Investor). Under the proposed agreement, a portion of Rogers' backhaul data transport network assets would be placed in a new joint venture subsidiary (NetworkJV) in which Rogers would be the majority owner and would also maintain operational control. The NetworkJV would enter into a supply agreement with Rogers and thus would generate revenue based on data volumes (average historical growth of +40%-50% per annum over the last five years). Rogers would be required to operate, maintain, and invest in the NetworkJV as per its normal business practice. In terms of the accounting treatment, we expect the NetworkJV would be reported as part of Rogers' consolidated financial results, with distributions to the Investor being recognized as Minority Interest.

Leverage Is Expected to Improve, However Cash Flow Metrics May Weaken
From a credit profile perspective, proceeds from the transaction are expected to be used to pay down Rogers' debt such that the Company anticipates 2024 year-end (YE) leverage of ~3.7 times (x) compared with 4.6x as of Q3 2024, which implies roughly a turn of leverage improvement, and is a material improvement over the Company's initial YE2024 target of ~4.2x. Although Rogers has indicated that it expects to save ~$300 million in interest expense, distributions to the Investor are expected to be in the range of $0.3 to well below $1.0 billion, which implies that the Transaction may negatively affect Rogers' cash flow despite the benefit to overall leverage.

Transaction Viewed as Credit Positive
The Transaction is expected to close in Q4 2024. We view the Transaction as credit positive, with a potential to accelerate Rogers' deleveraging plan. However, the final determination of the impact of the transaction on Rogers' credit risk profile will be predicated on a clear understanding of several key items including (1) a review of the final minority investment agreement structure; (2) the potential variability of risk and returns for NetworkJV; (3) the potential variability of distributions from NetworkJV; (4) an understanding of the Company's long-term intention with regard to the newly formed NetworkJV; (5) future funding intentions related to the MLSE transaction announced on September 18, 2024, which are expected to close in mid-2025 (the Company has indicated that the funding strategy will be leverage neutral); (6) a review of the financial risk profile in which leverage may improve materially; however, cash flow (and thus cash flow coverage metrics) is expected to deteriorate; and (7) the potential impact to long-term earnings if the Transaction is telegraphing that an intensifying competitive landscape is expected to pressure Rogers' long-term returns.

Notes:
All figures are in Canadian dollars.

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