Fitch: TELUS's Ratings Unaffected by its New Leverage Target

CHICAGO--(BUSINESS WIRE)-- TELUS Corporation's (TSX: T, NYSE: TU) 'BBB+' Issuer Default Rating (IDR) and Stable Rating Outlook will be unaffected following TELUS's disclosure of a higher leverage target, according to Fitch Ratings. The upper end of TELUS's target is at the high end of Fitch's existing rating sensitivities. In conjunction with the announcement of first quarter 2015 earnings, TELUS disclosed that it has revised its net leverage target to a range of 2.0x to 2.5x, up from its previous target of 1.5x to 2.0x.

Fitch expects TELUS' yearend 2015 gross leverage to rise to approximately 2.5x, 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 2.0x to 2.5x target range over the longer term.

In 2014, TELUS spent CAD1.14 billion to acquire spectrum in the 700 MHz auction and in 2015, its winning bids in the AWS-3 auction approximated CAD1.5 billion. With the AWS-3 auction and the 700 MHz auction -- completed in 2014 -- behind the company, the only remaining auction in the near term is the ongoing 2.5/2.6 GHz spectrum which started in April 2015. Fitch believes TELUS will be interested in adding capacity-type spectrum in the 2.5/2.6 GHz spectrum auction.

To a lesser extent, leverage has also resulted from TELUS' continued stock repurchases, as a total of CAD612 in stock repurchases were made in 2014. Over 2014-2016, the company intends to repurchase CAD1.5 billion of stock.

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.

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.

FCF and Capital Spending: In 2015, Fitch expects FCF (net cash from operating activities less capital spending and dividends) to be in the CAD300 million to CAD400 million range, an improvement over the CAD121 million in 2014. TELUS' guidance for capital spending indicates it will be similar to the CAD2.36 billion spend in 2014.

TELUS' 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 to operating cash flow to no more than 4x and operating cash flow to 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 CAD519 million outstanding at March 31, 2015. Consequently, the CAD2.25 billion revolving facility had approximately CAD1.7 billion in net availability.

The company's CAD500 million accounts receivable securitization program matures in December 2016, and TELUS had CAD100 million outstanding on March 31, 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 2015 are manageable at CAD125 million (excluding CAD519 million of commercial paper); CAD600 matures in 2016.

RATING SENSITIVITIES

A positive rating action could occur if:

--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.

A negative rating action could occur if:

--Gross leverage is 2.5x or higher due to a combination of acquisitions, spectrum purchases, and stock repurchases in the absence of a credible delevering plan;

--Operating profit declines owing to greater than anticipated competition could lead to a negative action if a return to stability is uncertain.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Telecommunications - Rating Navigator Companion' (Nov. 17, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Telecommunications: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

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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, New York, +1 212-908-0540
Email: [email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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