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Fitch Affirms Rogers at 'BBB+'; Outlook Stable
May 31, 2017 / 1:58 PM / in 6 months

Fitch Affirms Rogers at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 31 (Fitch) Fitch Ratings has affirmed Rogers Communications Inc.'s (Rogers) Long-Term Issuer Default Rating (IDR) and unsecured debt ratings at 'BBB+'. The Rating Outlook is Stable. KEY RATING DRIVERS Mid-2x Leverage by 2018 Rogers' credit profile remains weak with leverage beyond current rating guidance at the end of the first quarter 2017 at 3.0 times (x). However, Fitch believes Rogers is committed to a de-leveraging path back below 2.5x. This view is supported by the company's diversified revenue base, good profitability, moderating capital intensity and improved trajectory in its core Internet and wireless segments that should result in increasing levels of free cash flow (FCF). Consequently, Fitch expects leverage to improve during the next two years by an approximate 0.2x turn per year driven by debt reduction and EBITDA growth. Commitment to Rating A key aspect to Fitch's current view reflects Rogers' public commitment to maintaining leverage in the 2.0x to 2.5x range over the longer term. Fitch believes that Rogers' management team and Board of Directors are in full alignment and will demonstrate a consistency in its financial policy toward prioritizing debt reduction. Rogers' deferral of a dividend increase in both 2016 and 2017 demonstrates that commitment. Furthermore, Fitch views the Rogers' family control as a credit positive that serves as an underlying anchor with a long-term investment horizon. Good Asset Mix 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 completed several strategic transactions in the past several years to secure additional spectrum capacity to further bolster a robust spectrum portfolio and long-term rights for highly-valued sports content. The $1 billion plus Cogeco stake serves as a long-term strategic hedge and potential financial flexibility in the event of stress. Solid Profitability, Cost Opportunities Exist Rogers' mix of assets combined with relatively effective cost controls has been key components that underpin the company's ability to generate solid margins and good internally generated cash flow despite challenges from competition, technology and regulation risk. Competitive challenges and technology issues has resulted in some margin pressure and stagnating EBITDA growth as margins have declined approximately 200 basis points to 37% since 2013/2014. Rogers has focused on restoring top line growth through several initiatives that have gained traction in recent quarters. Fitch believes Rogers new CEO, Joe Natale, will bring further operating discipline to the company's key priorities that should improve the trajectory of productivity and efficiency efforts and lead to margin expansion during the next several years. Fitch views the largest factors outside the company's control of macroeconomic and regulatory as relatively benign with limited downside risks over the rating horizon as Rogers has relatively modest exposure in the oil and gas regions in Canada. Core Operational Improvement The positive trajectory in Rogers' core Internet and wireless segments have reset the foundation and improved the longer-term growth outlook. The wireless segment has experienced positive trends in gross add share, churn, ARPA and net additions as service revenue growth of 6.6% in the first quarter of 2017 was the best result since 2010. Internet revenues have been growing robustly, in the high-single to low double-digits. Consequently, higher margin Internet revenues now contribute 45% of total cable revenues at the end of the first quarter 2017, an increase from 37% since the beginning of 2015 that have largely offset erosion of TV and telephony revenues. The deployment of 1 Gbps high-speed broadband service across Rogers' entire footprint has created a marketing advantage and positive halo effect to drive increased broadband net additions and higher ARPUs. Comcast Platform a Positive Rogers plan to deploy Comcast's X1 IP based video platform in early 2018 further improves Rogers' competitive position and should address the weakness with Rogers' current TV offering that has led to subscriber losses of roughly 300,000 during the past three years. The enterprise market, in both wireless and wireline, where Rogers has lower share is also expected to be an increasing growth driver. While improved, customer service continues to lag peers and remains a work in progress. Fitch believes Natale's extensive background in this area is key to address long-term systemic cultural issues with consistently offering superior customer service experiences. KEY ASSUMPTIONS Additional key assumptions within Fitch's internally produced rating case for the issuer include: --Consolidated revenue increases by approximately 3% in 2017, the lower end of company guidance of 3% to 5%. For 2018, Fitch forecasts revenue growth increasing modestly from 3%. --EBITDA growth of approximately 3.8% with margin improvement of 20 basis points, which is toward the upper end of company guidance of 2% to 4%. For 2018, Fitch forecasts margin improvement of 40 basis points due to efficiency initiatives and improving cable trends. --FCF in the range of $650 million +/- 10% in 2017 based on capital spending of $2.325 billion (slightly higher than midpoint of company guidance) and lower interest costs. Cash taxes will increase moderately from 2016 levels of $295 million. Fitch expects FCF will rise moderately beyond 2017 benefitting from lower capital intensity, core operational improvements cost efficiency initiatives. --Leverage expected to decrease to 2.8x in 2017 and 2.6x in 2018. 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: --Any material M&A, spectrum acquisitions or step-ups in shareholder distributions, including dividend and share repurchases that causes Rogers to deviate from Fitch's expectations for leverage reduction to the mid 2.5x range by 2018; --Rogers does not execute on current operational initiatives resulting in lower revenue growth and margin erosion due to competitive pressures resulting in a failure to delever as expected. Solid Financial Flexibility and Liquidity Rogers is well-positioned from a liquidity perspective with expectations for consistent FCF generation and undrawn capacity on its credit facilities. Rogers generated approximately CAD584 million in FCF (FCF defined as cash from operations less capital spending less dividends) during the LTM period. For 2017, Fitch expects FCF in the range of $650 million. FCF should rise moderately beyond 2017 benefitting from moderating capital intensity, core operational improvements and efficiency initiatives. During the first quarter of 2017, Rogers amended its revolving credit facility to extend the maturity date of the CAD2.5 billion facility to March 2022. In addition, Rogers added a $700 million tranche to the facility that matures in March 2020 for a total credit limit of $3.2 billion. Rogers also entered into a $1 billion U.S. dollar denominated commercial paper program. With CAD266 million of CP outstanding and CAD491 million drawn on the revolver at the end of the first quarter 2017, Rogers had approximately CAD2.4 billion of revolver availability. Rogers' also maintains a CAD1.05 billion accounts receivable program, maturing in January 2019, that had CAD870 million drawn leaving CAD180 million of availability. Maturities are material during the next three years and include CAD500 million remaining in 2017 and US$1.4 billion in 2018 and CAD900 million in 2020. Fitch expects Rogers to use undrawn short-term liquidity to repay 2017 senior notes maturity and pay down debt as cash flow builds. FULL LIST OF RATING ACTIONS Fitch has affirmed Rogers' ratings as follows: --IDR at 'BBB+'; --Senior unsecured notes at 'BBB+'. The Rating Outlook is Stable. Contact: Primary Analyst William Densmore Senior Director +1-312-368-3125 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Senior Director Alen Lin Senior Director +1-312-368-5471 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Adjustments are made to total debt to account for the on balance sheet financial derivatives; --Reclassification of investing cash flow to working capital. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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