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Private conversations between Canada's telecommunications giants and their debt rating agencies are morphing into very public actions, with the telcos finally signalling they are close to tapping out on debt.
In the past six months, BCE Inc. shocked the market by selling $862-million worth of new shares, its first offering since 2002; Rogers Communications Inc. surprised investors and analysts by not raising its dividend; and Telus Corp. sold its stake in an international call centre to generate cash.
BCE explicitly said proceeds from the share sale would go toward paying down debt, while Rogers and Telus have been a bit more coy but stressed that their balance sheet is a focus. On its most recent quarterly call, Rogers' chief financial officer chalked up its dividend decision to "prudent stewardship of our financials," adding that lower debt is a "priority."
Until now, the rating agencies haven't said much about their talks with the telcos, but the general assumption is that they are worried.
Such concern was made clear this week when Moody's Investors Service put Telus on notice for a possible downgrade. A one-notch downgrade would leave the company two notches above junk; it has been investment-grade for more than a decade, and had to regain that status after its pricey Clearnet acquisition during the dot-com bubble.
In interviews Thursday, both Moody's and Standard & Poor's did not shy away from their concerns. "We've been pretty clear about our expectations for leverage for the industry, and we would agree with the view that the industry's debt is high for [its] ratings at the current point," Standard & Poor's analyst Don Marleau said.
Moody's analyst Bill Wolfe said his team has flagged the sector's creeping debt woes for five years, yet "companies continued to push the envelope."
The rating agencies don't necessarily blame the telcos for doing so, appreciating that debt has been incredibly cheap, lowering debt costs. BCE has refinanced most of its borrowings since the global financial crisis and dropped its average cost of debt by roughly 250 basis points, or 2.5 percentage points.
"In a low interest-rate environment, from an analytical perspective, you can say a company can handle a bit more leverage because rates are lower – just like buying houses," Mr. Wolfe said.
But the telcos are also spending heavily. All three have doled out billions for wireless spectrum; both BCE and Telus are investing in fibre cables to increase their bandwidth for cable and TV; and Rogers spent $5.2-billion on NHL hockey rights. Acquisitions such as BCE's recently proposed purchase of Manitoba Telecom Services Inc. are then layered on top.
Both S&P and Moody's said they can justify many of these outlays, because they are designed to deliver future growth.
Telcos typically cite their free cash flow before any dividends are paid, but the rating agencies focus on the post-dividend figure – and that's kept dwindling because the Big Three have adopted dividend-growth models to win over investors.
Rogers' decision to curb its dividend hikes speaks volumes amid this backdrop. Whether the decision, and those of its rivals, goes far enough is still unknown. By placing Telus's rating under review this week, Moody's suggested the Western Canadian giant may not have done enough.
Despite the review, the telco is defending its strategy.
"Telus remains committed to maintaining both its investment-grade credit ratings and its shareholder-friendly initiatives, while continuing to make generational investments in fibre optic networks and wireless spectrum to support Canada's digital economy," the company said in an e-mailed statement. "We are very comfortable our proven strategy, quality of earnings and balance sheet strength will continue to support the company's long-term growth opportunities."