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

CHICAGO--()--Fitch Ratings has assigned a 'BBB+' rating to TELUS Corporation's (TSX: T, NYSE: TU) offering of CAD600 million senior unsecured notes due 2026. In addition, Fitch is maintaining the 'BBB+' rating on TELUS's offering of CAD400 additional 4.85% senior unsecured notes due 2044, which is a reopening of CAD500 million 4.85% senior unsecured 2044 notes previously issued in April 2014.

Net proceeds are expected to be used to repay commercial paper borrowings, repay a portion of the CAD600 million 3.65% notes due May 25, 2016 on maturity with the remaining balance to be used for general corporate purposes.

TELUS' Issuer Default Rating (IDR) is currently 'BBB+'. The Rating Outlook is Stable.

KEY RATING DRIVERS

Strong Position in a Competitive Market: TELUS Corporation's 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 FCF (EBITDA less capital spending). Wireline results have also been solid, as TELUS has experienced consistent wireline revenue growth since 2011.

Leverage: Fitch expects TELUS's yearend 2015 gross leverage to rise to approximately 2.6x, up from year-end 2014 leverage of 2.14x. The primary cause of the rise in leverage has been the acquisition of spectrum in 2014 and 2015, a key resource that is largely only available to TELUS through the auction process. Fitch believes continued moderate EBITDA growth will provide the company with the flexibility to manage net leverage within its recently revised 2.0x to 2.5x target range over the longer term.

Spectrum Spending: In 2014 and 2015, TELUS faced a more concentrated than usual schedule of spectrum auctions and spent approximately CAD3.2 billion to acquire spectrum in the 700 MHz, AWS-3 and 2.5 GHz auctions, more than doubling its nationwide spectrum holdings.

Stock repurchases: To a lesser extent, leverage has also resulted from TELUS's continued stock repurchases, as a total of CAD402 million of repurchases were made through the first nine months of 2015, following CAD612 in repurchases made in 2014. Over 2014 - 2016, the company intends to repurchase CAD1.5 billion of stock.

FCF and Capital Spending: In 2015, Fitch expects FCF (net cash from operating activities less capital spending and dividends) to be around the CAD121 million generated in 2014. While cash taxes are expected to be lower in 2015 relative to 2014, capital spending is expected to rise modestly. TELUS's guidance for 2015 capital spending is CAD2.5 billion, above the CAD2.36 billion spent in 2014.

KEY ASSUMPTIONS

--Fitch assumes revenues will grow in the mid-single digits in 2015 and taper off to the low- to mid-single digits thereafter. EBITDA margins are expected to remain relatively stable in the 36% to 38% range.

--Fitch believes that through EBITDA growth and debt repayment TELUS is likely to reach gross leverage of approximately 2.2x by the end of 2017.

--In 2015, Fitch expects consolidated capital spending to be in line with company guidance of CAD2.5 billion. TELUS continues to focus on its wireline and wireless broadband infrastructure, as well as the continued deployment of 700 MHz spectrum.

RATING SENSITIVITIES

Positive: The rating could be upgraded if the company committed to maintaining leverage at a level lower than anticipated, i.e. in the range of 1.5x to 1.75x, along with continued strong wireless operating performance and stable wireline performance.

Negative: A negative rating action could be prompted by 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 AND DEBT STRUCTURE

TELUS's financial flexibility is good, owing to its undrawn revolver capacity and accounts receivable securitization program. TELUS maintains a CAD2.25 billion revolving credit facility maturing in May 2019. 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 to no less than 2x. The revolver backstops a commercial paper program, which TELUS has used as an alternative source of financing, which had CAD787 million outstanding at Sept. 30, 2015. Consequently, the CAD2.25 billion revolving facility had CAD1.463 billion in net availability. Commercial paper is denominated in U.S. dollars.

The company's CAD500 million accounts receivable securitization program matures in December 2016, and TELUS had CAD100 million outstanding on Sept. 30, 2015, flat with the end of 2014. 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.

Maturities in 2016 are manageable at CAD600 million (excluding commercial paper); CAD700 million matures in 2017.

Date of Relevant Committee: January 22, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995930

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Contacts

Fitch Ratings
Primary Analyst
John C. Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
John C. Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com