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Fitch Rates TELUS' Senior Unsecured Notes Offering 'BBB+'; Outlook Stable
March 1, 2017 / 10:06 PM / 9 months ago

Fitch Rates TELUS' Senior Unsecured Notes Offering 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, March 01 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to TELUS Corporation's (TSX: T, NYSE: TU) offering of CAD325 million of senior unsecured notes due 2048 and $500 million of senior unsecured notes due 2027. Net proceeds are expected to be used to repay at maturity the company's CAD700 million of notes due March 2017 and to repay commercial paper, with the remaining balance to be used for general corporate purposes. TELUS's Issuer Default Rating (IDR) is currently rated 'BBB+'. The Rating Outlook is Stable. KEY RATING DRIVERS Strong Position in a Competitive Market: TELUS Corporation's (TELUS) ratings reflect the stability of the company's diversified operations, its position as one of the three principal national wireless operators in the Canadian market and its leading market position as a local wireline operator in western Canada and eastern Quebec. Growing Wireless and Wireline Data Revenues: Fitch believes the rating is supported by the continued strong performance of the wireless business, which generates solid growth in revenues, EBITDA and simple free cash flow (FCF; EBITDA less capital spending). Wireline results have also been solid, as TELUS has experienced consistent wireline revenue growth since 2011. Gross Leverage: Gross leverage for year-end 2016 was 2.7x, similar to the level at year-end 2015. Leverage is moderately elevated due to the acquisition of spectrum in auctions in recent years; spectrum is a key resource that is largely only available to TELUS through the auction process. Fitch believes moderate EBITDA growth will provide the company with the flexibility to manage net leverage within its 2.0x to 2.5x target range over the longer term. However, Fitch does not expect TELUS to get back within this range until early 2018. Stock Repurchases: TELUS's current normal course issuer bid (NCIB) program, announced in May 2016, permits purchases of up to CAD250 million in each calendar year for the next three years (the program is renewed each year). The current NCIB is more discretionary in nature than the previous NCIB, leading to lower repurchase levels. In 2016, TELUS repurchased CAD179 million in shares, in contrast to CAD628 million in 2015. TELUS International (TI): In June 2016, TELUS completed the sale of a noncontrolling 35% interest in TI to Baring Private Equity Asia, valuing the business at CAD1.2 billion. TELUS received approximately CAD600 million from the transaction including proceeds from incremental debt within TI. In total, TI has a CAD332 million nonrecourse financing (Fitch includes this debt within TELUS's consolidated debt) secured by TI's assets. TELUS used the proceeds to invest in its wireless and wireline networks. FCF and Capital Spending: TELUS's guidance for 2017 capital spending is CAD2.9 billion, similar to 2016 levels. KEY ASSUMPTIONS --Fitch assumes consolidated revenue grows in the low single digits in 2017. --Fitch expects the EBITDA margin to improve owing to efficiency initiatives. Restructuring costs are excluded from EBITDA but are included in non-operating cash flow as projected (CAD125 million total). --Cash taxes in 2017 are expected to decline to a range of CAD300 million to CAD360 million from CD600 million in 2017. RATING SENSITIVITIES Positive Rating Action: The rating could be upgraded if the company committed to maintaining gross leverage at a level lower than anticipated, i.e. in the range of 1.5x to 1.7x, along with continued strong wireless operating performance and stable wireline performance. Negative Rating Action: A negative rating action could be prompted by sustained gross leverage of 2.5x or higher due to a combination of acquisitions, spectrum purchases and stock repurchases in the absence of a credible deleveraging plan. In addition, operating profit declines owing to greater-than-anticipated competition could lead to a negative action if a return to stability is uncertain. LIQUIDITY Strong Liquidity: TELUS's financial flexibility is good, owing to its cash and temporary investments, undrawn revolver capacity, commercial paper program and accounts receivable securitization program. Cash and temporary investments amounted to CAD432 million at Dec. 31, 2016. TELUS maintains a CAD2.25 billion revolving credit facility maturing in May 2021. The financial ratio covenants in the credit facility restrict net debt/operating cash flow to no more than 4x and operating cash flow/interest expense of no less than 2x. The revolver backstops TELUS's CAD1.4 billion commercial paper program, which had CAD613 million outstanding at Dec. 31, 2016. Consequently, the CAD2.25 billion revolving facility had CAD1.64 billion in net availability. Commercial paper is denominated in U.S. dollars. The company's CAD500 million accounts receivable securitization program matures in December 2018, and TELUS had CAD100 million outstanding on Dec. 31, 2016, flat with the amount outstanding at the end of 2015. The program contains a trigger clause, which would unwind the program if TELUS Communications Inc. is rated below 'BB' by a Canadian rating agency, though Fitch believes this is unlikely given its current rating level. Near-term maturities are manageable at CAD700 million in 2017--to be repaid by the current offering--and CAD250 million in 2018. Contact: Primary Analyst John C. Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bill Densmore Senior Director +1-312-368-3125 Committee Chairperson Jason Pompeii Senior Director +1-312-368-3210 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Date of Relevant Rating Committee: March 31, 2016 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: --No material adjustments have been made that have not been disclosed in public filings of this issuer. 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