Rogers Bets Big on Credit Markets in $16 Billion Shaw Deal

To finance its $16 billion acquisition of a smaller rival, Rogers Communications Inc. plans to boost its debt load to a level so high that weaker companies would be at risk of being cut to junk. It’s a high-stakes wager that the Canadian telecom company will be able to cut costs and pay down its borrowings quickly after its takeover of Shaw Communications Inc.

The company is counting on demand for credit to remain strong after Verizon Communications Inc. sold $25 billion of bonds to help finance purchases of 5G airwaves last week. The debt sale, which tied for the sixth largest U.S. high-grade securities offering ever, garnered $109 billion in demand at the peak.

Rogers is always looking for opportunities to refinance its debt and that will continue “whether it’s outside or inside this transaction,” Chief Executive Officer Joe Natale said. The merger’s timing was helped by supportive capital markets, he added. “The bridge financing we received already and the interest that we have in terms of financing this transaction has been immense.”

Canada is expected to start a 3500 MHz spectrum auction June 15, a key component in the expansion of 5G telecom services. In the U.S., a rush by communication giants Verizon and AT&T Inc. to buy 5G wireless airwaves has added billions of dollars to the corporate bond sales pipeline.

The leverage ratio for the combined Rogers/Shaw company is expected to be just over five times debt to earnings before interest, tax, depreciation and amortization, which could put pressure on current credit ratings. Leverage will decline in the coming three years to 3.5 times, allowing them to retain an investment-grade credit rating, Rogers’ Chief Financial Officer Tony Staffieri said in a conference call following the announcement of the agreement.

“North of five times debt-Ebitda is an unusually high leverage ratio to see in the investment-grade space. But if anyone knows how to deal well with high amounts of leverage, it’s Rogers.” said Randy Steuart, portfolio manager at Ewing Morris Investment Partners. “Rogers is no stranger to using leverage intelligently and this cash-heavy consideration indicates a very high confidence in the company’s deleveraging path.”

Rogers Bets Big on Credit Markets in $16 Billion Shaw Deal

Rogers is rated BBB+ by S&P Global Ratings, two steps higher than Shaw Communications. The ratings company put Rogers on watch for a potential downgrade Monday, while Fitch Ratings put its BBB+ score on negative watch and said a downgrade would likely be limited to one notch.

“There is high risk to the C$1 billion synergy benefits RCI anticipates over the next couple of years. In our view, the elevated leverage significantly limits the company’s financial flexibility if Ebitda accretion from synergies is delayed,” S&P’s Aniki Saha-Yannopoulos said in an statement Monday. “As a result, we view the credit metrics in line with the weaker end of the ‘BBB’ category and believe they could lead to a two-notch downgrade.”

Rogers’ $1 billion of 3.7% bonds due 2049 were among the biggest decliners in the U.S. investment-grade bond market on Monday, widening to 143 basis points more than Treasuries compared with about 126 at the end of last week, according Trace pricing.

Rogers Bets Big on Credit Markets in $16 Billion Shaw Deal

“We have a high degree of confidence that we can aggressively work down that debt-to-leverage ratio,” Staffieri said. Company management spent “quite a bit of time” with credit rating companies last week, walking them through their financial models, he said.

The C$40.50-per-share cash offer has the support of Shaw’s board, the companies said Monday. The proposal represents a 69% premium to Shaw’s most recent closing price. Efficiencies may come from the optimization of the resulting company debt profile, Bloomberg Intelligence analyst John Butler said.

Rogers has retained Bank of America Corp’s BofA Securities and Barclays Plc as its financial advisers for the transaction while Shaw has hired TD Securities Inc.

Bank of America is also providing the company with a C$19 billion bridge loan to finance the deal, according to people with knowledge of the matter. The transaction, one of the largest single-source M&A loans provided in Canada, will be syndicated, said the people, who asked not to be identified because the details are private. The loan may be refinanced with a mix of bonds and term loans in currencies including Canadian and U.S. dollars, one of the people said.

A representative for BofA declined to comment.

“The deal is aimed at boosting Rogers’ presence in Western Canada and building a true, national footprint for 5G,” Butler said. “The deal also provides Rogers greater scale efficiencies from an operational standpoint.”

U.S.

Junk bonds are about $9 billion away from making this the second busiest March on record for issuance, according to data compiled by Bloomberg. With more than $27 billion already sold this month, that could happen as soon as this week with more companies expected to hit the market to lock in low borrowing costs.

  • Six companies tapped the U.S. investment-grade bond market

    • Projections for the week call for around $35 billion with a potential jumbo bond in the works
  • For deal updates, click here for the New Issue Monitor
  • For more, click here for the Credit Daybook Americas

Europe

Verizon Communications Inc. led a charge by issuers with a three-part offering, following its hefty $25 billion sale in the U.S. last week. It also announced an Australian deal.

  • The European transaction was one of 10 in the market, including sales by insurer Hannover Rueck SE and Barclays Plc of so-called Tier 2 debt that takes losses before senior debt when a financial firm runs into trouble
  • There were several issuers hiring banks ahead of likely bond sales, including Medical Properties Plus Inc. which is readying a sterling deal, and Simon Property Group which will issue in euros
  • CVC-owned retailer Douglas GmbH is seeking to refinance bonds and loans with new debt supported by a 220 million-euro equity injection

Asia

China’s Fujian Yango Group was the only borrower offering dollar bonds Monday after issuance in Asia picked up last week.

  • Yield premiums on Asia ex-Japan investment-grade dollar bonds and the cost to insure them against default rose in early trading Monday after U.S. Treasury yields jumped Friday. This week’s Fed’s policy meeting is a key market focus

    • Spreads on the region’s high-grade dollar notes widened about 2bps, according to credit traders, as the yield on the 10-year U.S. Treasury remained around a 1-year high
  • Yield premiums on Xiaomi’s dollar bonds were indicated 2-3bps tighter, credit traders said, after a U.S. court blocked a government investment ban on the firm

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