Fitch: TELUS's Ratings Unaffected by Capital Allocation Initiatives

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings does not expect TELUS Corporation's (TSX: T, NYSE: TU) and its subsidiary's Long-Term Issuer Default Ratings (IDRs) to be affected by today's announcement regarding the extension of its multi-year share repurchase program and dividend increases, as well as the sale of a 35% stake in TELUS International.

TELUS has extended its multi-year discretionary share repurchase program in the amount of up to CAD250 million annually over 2017 to 2019, a level lower than its previous multi-year plan which targeted purchases of CAD500 million annually. The company is targeting dividend increases over the same period in the range of 7% to 10% annually, lower than the 10% target in its previous plan. Both are subject to the discretion of TELUS's board of directors.

The company has also disclosed the sale of 35% of its TELUS International business to Barings Private Equity Asia with expected proceeds of CAD600 million. Fitch expects the transaction to be slightly delevering on TELUS's balance sheet after taking into account expected drawings on a CAD425 million senior secured facility to be put in place at TELUS International. Although the facility is non-recourse to TELUS, the debt outstanding will be incorporated into Fitch's leverage metrics.

Fitch's April 2016 affirmation of TELUS's 'BBB+' Long-Term IDR and the Stable Rating Outlook assumed TELUS would complete its current 2016 normal course issuer bid (NCIB) share repurchase program as well as increase dividends by approximately 10% in 2016 under the final year of its 10% annual dividend increase target. Fitch did not assume any share repurchases in 2017 and beyond, and assumed moderate 5% annual dividend increases beginning in 2017. Under these assumptions, Fitch expected TELUS to delever to approximately 2.5x, the high end of Fitch's rating threshold for the current rating.

Taking into account today's announcements, Fitch continues to believe TELUS will be able to delever in 2017 to approximately the same 2.5x threshold, assuming dividend increases at the midpoint of TELUS's expressed 7% to 10% target range, and assuming the maximum level of share repurchases of CAD250 million in 2017 owing to the delevering effect of the sale of the partial stake in the international business. After 2017, delevering continues under the new assumptions, albeit at a slower pace than Fitch previously expected.

Fitch has not incorporated the acquisition cost or EBITDA from the potential acquisition of certain wireless subscribers in Manitoba given the uncertainties regarding regulatory approval of Bell Canada Enterprises acquisition of Manitoba Telecom Services.

TELUS's financial flexibility is good, owing to its undrawn revolver capacity, commercial paper program, and accounts receivable securitization program. TELUS maintains a CAD2.25 billion revolving credit facility maturing in May 2021 (recently extended from May 2019). The financial ratio covenants in the credit facility restrict net debt to operating cash flow of no more than 4x and operating cash flow to interest expense of no less than 2x. The revolver backstops TELUS's CAD1.4 billion commercial paper program, which had CAD891 million outstanding at March 31, 2016. Consequently, the CAD2.25 billion revolving facility had CAD1.359 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 (recently extended from December 2016), and TELUS had CAD100 million outstanding on March 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. This requirement was lowered from the previous 'BBB-'.

Maturities in 2016 are manageable with CAD600 million maturing in the latter part of May 2016 (the total excludes commercial paper); CAD700 million matures in 2017.

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.

Fitch currently rates TELUS as follows:

TELUS Corporation (TELUS)

--IDR 'BBB+';

--Senior unsecured notes 'BBB+'.

TELUS Communications Inc. (TCI)

--IDR 'BBB+';

--Senior unsecured debentures 'BBB+'.

Date of Relevant Rating Committee: April 1, 2016

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Primary Analyst
John C. Culver, CFA, +1-312-368-3216
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore, +1-312-368-3125
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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