Fitch Rates TELUS' Debt Issuance 'BBB+'; Outlook Stable

Wireless News
05-24-2011
Fitch Rates TELUS' Debt Issuance 'BBB+'; Outlook Stable
Type: News

Fitch Ratings has assigned a 'BBB+' rating to TELUS Corp.'s (TELUS) CAD600 million 3.65 percent senior unsecured note offering due in 2016. Proceeds from the offering will be applied to the repayment of the company's outstanding US$748.5 million 8 percent notes due June 1, and accrued interest. Excluding accrued interest but including the associated cross-currency and interest rate swaps, the amount payable associated with the maturity is $1.135 billion. The remaining balance for repayment will be funded from a combination of drawings on its revolving credit facility, commercial paper, an accounts receivable securitization program and/or operating cash flows. The Rating Outlook is Stable.

TELUS' ratings reflect the company's diversified revenue mix, 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. In addition, wireless simple free cash flow (FCF; EBITDA less capital spending) has improved due to the completion of TELUS Mobility's advanced third-generation (3G) high-speed packet access plus (HSPA+) wireless network in late 2009. Capital spending in the wireline segment has declined, due to the wind down of spending on the ADSL2+ high-speed data deployment partly offset by spending on other growth areas. These strengths are partly offset by pressure on operating results caused by competition.
The Canadian economy has moderately expanded since emerging from the recession in the third quarter of 2009, and the improvement has contributed to a strengthening of wireless postpaid gross and net additions. Fitch expects postpaid subscriber growth to remain moderate, given the maturation of the market and as new operators launch service in the advanced wireless services (AWS) spectrum band. In Fitch's view, in the longer term wireless services revenue growth, particularly data, and wireline data services revenue growth are key to the company's stability. Both services provide an important offset to the pressure the company is experiencing in its wireline voice operations. The latter operations are experiencing competitive pressures from wireless substitution, as well as cable operators expanding voice-over-Internet protocol (VoIP) offerings. In 2010, external wireless and wireline data revenues were 74 percent of consolidated revenues, up from 71 percent in 2009.

For the latest 12 month (LTM) ended March 31, leverage was approximately 1.8 times (x), slightly higher than year-end 2010. Although EBITDA grew modestly, Fitch's leverage calculation now includes the accounts receivable securitization program as it is now on balance sheet due to the adoption of IFRS accounting on Jan. 1. Adjusted debt to EBITDA remained flat at 2.2x for the LTM ended March 31, relative to year-end 2010. Fitch anticipates leverage may improve modestly to 1.6x-1.7x in 2011 as a result of continued EBITDA growth and a slight decline in debt during the remainder of the year.

TELUS' financial flexibility is good, owing to its FCF, undrawn revolver capacity, commercial paper program, and accounts receivable securitization program. FCF for the LTM ending March 31, was approximately CAD247 million, and balance sheet cash and temporary investments amounted to CAD23 million as of March 31. TELUS maintains a CAD2 billion revolving credit facility maturing in May 2012. The financial ratio covenants in the credit facility include net debt to operating cash flow of less than 4x and operating cash flow to interest expense greater than 2x. The revolver backstops TELUS' commercial paper program, which had CAD254 million outstanding at March 31. In addition, there were outstanding undrawn letters of credit of CAD117 million against the revolver. Consequently, the CAD2 billion revolving facility had CAD1.629 billion in net availability.

The company's CAD500 million accounts receivable securitization program matures in May 2012, and TELUS had CAD400 million outstanding at the end of the first quarter of 2011, remaining flat with the amount outstanding at the end of 2010. The program contains a trigger clause, which would unwind the program if TELUS Communications, Inc. (TCI) is rated below investment grade by a Canadian rating agency, though Fitch believes this is unlikely given its current rating level.

Upon the redemption of the June 2011 notes, debt maturities for the remainder of 2011 consist of approximately CAD259 million (including CAD254 million of commercial paper), CAD300 billion due in 2012 and CAD300 million due 2013.

In May 2011, TELUS released guidance indicating its dividend policy over 2011-2013 would target two dividend increases annually approximating 10 percent per annum. In 2010, TELUS increased its long-term guidelines for a dividend payout ratio to 55 percent-65 percent of sustainable net earnings on a prospective basis from 45 percent-55 percent, based on improved earnings prospects and moderating capital expenditures.

Additional information is available at 'fitchratings.com'.

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