[April 01, 2015]

Fitch Affirms Rogers Communications at 'BBB+'; Outlook Negative

Fitch Ratings has affirmed the ratings for Rogers Communications (News - Alert) Inc. (Rogers) at 'BBB+'. The Rating Outlook is Negative. See the full list of ratings at the end of this release.

KEY RATING DRIVERS

Good Asset Mix, Restructuring Needs to Gain Momentum (News - Alert)

Fitch believes Rogers' mix of wireless and cable assets positions the company competitively and allows for significant revenue diversification through its robust bundled service offerings. Rogers has also completed several strategic transactions in the past couple of years to secure additional spectrum capacity in the 700 MHz auction and long-term rights for highly valued sports content. The mix of assets combined with good cost controls are key components that underpin Rogers' ability to sustain its profitability with strong internally generated cash flow evidenced by relatively consistent EBITDA and funds from operations (FFO) margins. For 2014, EBITDA and FFO margins were 39% and 29%, respectively.

The strength of Roger's operating margins is a good indicator of the company's ability to effectively manage challenges to its business profile from different influences like competition, regulation and technology risk. However, Rogers will need to improve execution of top-line growth initiatives by simplifying offerings, targeting investments to improve customer experience and improving productivity and sales discipline, as the firm has lagged its peers during the past couple of years.

Both the wireless and cable operations have experienced greater competitive threats, which will continue. The expansion of IPTV (News - Alert) footprint across Rogers' markets, which is now estimated at more than two thirds of its footprint, has led to an elevated loss in basic cable subscribers the past couple of years. The combination of Bell Mobility's and TELUS' (News - Alert) wireless networks and deployment of GSM and HSPA technologies enabled Rogers' peers to level the playing field. As a result, Rogers has regressed to the mean as evidenced by an approximate 300-basis point drop in wireless revenue share of the three national providers to 36% during the past two years.

Rogers is still in the relatively early stages of their restructuring plans, which has essentially rebuilt the company's foundation for its new customer-focused strategies. Failure to make progress as the plan matures through implementation during the next 12-18 months could further pressure Rogers' ratings given the elevated leverage related to the 700 MHz spectrum purchase.

Elevated Leverage

The Negative Rating Outlook reflects the increase in financial risk associated with Rogers' $3.3 billion 700 MHz spectrum. The cash requirements were substantially above expectations although Fitch acknowledges the strategic importance and lumpiness related to the spectrum investment and that the company's wireless competitive position would be materially diminished without it.

Leverage at the end of 2014 was 3x, which was within the range of Fitch's initial leverage expectations of 2.9x-3x. With the elevated leverage, Rogers has limited ratings flexibility for operating shortfalls, material unexpected cash requirements from other initiatives, or other additional leveraging events. Thus, the company should reduce leverage to improve its financial risk profile. Fitch believes Rogers has the ability to reduce leverage primarily through debt reduction and EBITDA growth to less than 2.5x by 2017.

Proceeds from non-core asset sales could also provide additional deleveraging benefits, including Rogers $1 billion-plus stake in Cogeco. However, Fitch does not include an asset sale of Cogeco in its financial analysis as a potential sale is highly speculative and uncertain.

Solid Financial Flexibility and Liquidity

Rogers CAD2.5 billion credit facility matures in July 2019 was undrawn as of Dec. 31, 2014. During first quarter 2015, Rogers drew down on the credit facility to retire US830 million of debt that came due in March 2015. This provides Rogers flexibility to repay debt through FCF generation or asset sales. At the beginning of 2015, Rogers' also upsized its CAD900 million accounts receivable securitization program by CAD150 million to CAD1.05 billion and expanded the program term to January 2018. The accounts receivable program had CAD842 million outstanding at the end of 2014.

Shareholder Returns Moderated

In the past, Rogers has focused excess capital on its shareholders through its dividend and share repurchases when Rogers was within the company's targeted leverage range of 2x-2.5x. From 2009 to 2012, Rogers returned to shareholders an average of CAD1.8 billion. The company has refocused its financial policy to improve financial flexibility for the anticipated debt reduction. The annualized dividend increase the past two years was 5%, a reduction from the double-digit dividend increases pre-2013. Rogers has also refrained from share repurchases since early 2013 and did not renew the normal course issuer bid program in February 2015.

KEY ASSUMPTIONS

Additional key assumptions within Fitch's internally produced rating case for the issuer include:

--Revenue growth in the low single digits with a 2% increase in 2015, growing to approximately 3% in 2016;

--EBITDA of CAD5.1 billion in 2015 and CAD5.2 billion in 2016;

--Leverage improving to 2.7x range in 2016;

--Cash taxes to peak in 2015 or 2016 before declining to more normalized levels beginning in 2017;

--Capital investment remain at similar levels to 2014 throughout Fitch's forecast period.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--An upgrade is unlikely given Rogers' elevated leverage.

Negative: Future developments that may, individually or collectively, lead to negative rating include:

--Discretionary actions by Rogers adopting a more aggressive shareholder-based financial strategy, a lack of commitment or focus on deleveraging, or an event driven merger and acquisition activity that delays the progress of anticipated deleveraging of the balance sheet to 2.5x by 2017;

--Rogers fails to sustain traction with current restructuring plan. Consequently, expected ARPU increases in cable broadband and wireless postpaid fail to materialize and subscriber trends in wireless postpaid, cable broadband and/or TV continue to decline at elevated levels driven by competitive pressures;

--EBITDA margins deteriorate by at least 200 basis points.

Fitch affirms Rogers' ratings as follows:

--Issuer Default Rating (IDR) at 'BBB+';

--Senior unsecured notes at 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology' (May 28, 2014);

--'Telecommunications - Ratings Navigator Companion (Nov. 17, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Singapore Telecommunications Limited - Ratings Navigator

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818770

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982337

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