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(Bloomberg) – To fund its $ 16 billion acquisition of a smaller rival, Rogers Communications Inc. plans to increase its debt load to such a high level that weaker companies risk being squeezed into the trash. It is a strong bet that the Canadian telecommunications company will be able to reduce its costs and repay its loans quickly after its takeover of Shaw Communications Inc.
The company is counting on credit demand to stay strong after Verizon Communications Inc. sold $ 25 billion in bonds to help fund 5G wave purchases last week. The sale of debt securities, which tied the sixth supply of high-quality securities in the United States, generated $ 109 billion in demand at the top.
Rogers is always looking for opportunities to refinance its debt and this will continue “whether outside or as part of this transaction,” CEO Joe Natale said. The timing of the merger was made easier by the support of the financial markets, he added. “The bridge financing that we have already received and the interest we have in terms of financing this transaction has been immense.”
Canada is expected to launch a 3500 MHz spectrum auction on June 15, a key part of the expansion of 5G telecommunications services. In the United States, the rush of communications giants Verizon and AT&T Inc. to buy 5G wireless waves has added billions of dollars to the corporate bond sales pipeline.
The combined Rogers / Shaw company’s debt ratio is expected to be just over five times debt to earnings before interest, taxes, depreciation and amortization, which could put pressure on current credit ratings. The leverage will decrease over the next three years to 3.5 times, which will allow them to maintain a blue chip credit rating, Rogers CFO Tony Staffieri said on a conference call to following the announcement of the agreement.
“North of five times the debt, EBITDA is an unusually high debt ratio to see in the investment grade realm. But if anyone is good at handling high leverage, it’s Rogers. Said Randy Steuart, portfolio manager at Ewing Morris Investment Partners. “Rogers is no stranger to the smart use of leverage and this cash-heavy consideration indicates tremendous confidence in the company’s deleveraging trajectory.
Rogers is rated BBB + by S&P Global Ratings, two steps higher than Shaw Communications. The rating firm put Rogers on watch for a possible downgrade on Monday, while Fitch Ratings put its BBB + score on negative watch and said a downgrade would likely be limited to one notch.
“The C $ 1 billion synergy benefits that RCI expects over the next two years present a high risk. In our view, high leverage severely limits the financial flexibility of the company if the accretion of EBITDA from synergies is delayed, ”S&P’s Aniki Saha-Yannopoulos said in a statement on Monday. “Accordingly, we consider the credit metrics in line with the lower end of the ‘BBB’ category and believe they could lead to a downgrade of two notches.”
Rogers $ 1 billion 3.7% bonds due 2049 were among the strongest declines in the U.S. investment grade bond market on Monday, dropping 143 basis points higher than Treasuries, from around 126 at the end of last week, according to Trace pricing.
“We are confident that we can aggressively reduce this debt-to-leverage ratio,” Staffieri said. Company management spent “quite a bit of time” with credit rating companies last week, explaining their financial models to them, he said.
The cash offer of C $ 40.50 per share is supported by Shaw’s board of directors, the companies said on Monday. The offer represents a 69% premium over Shaw’s last closing price. Efficiency gains can come from optimizing the resulting corporate debt profile, said John Butler, analyst at Bloomberg Intelligence.
Rogers retained BofA Securities and Bank of America Corp’s Barclays Plc as financial advisers for the transaction, while Shaw hired TD Securities Inc.
Bank of America is also giving the company a C $ 19 billion bridging loan to fund the transaction, according to people with knowledge of the matter. The deal, one of the largest single-source M&A loans granted in Canada, will be syndicated, said the people, who asked not to be identified as the details are private. The loan can be refinanced with a combination of bonds and term loans denominated in currencies, including Canadian and US dollars, one of the people said.
A representative for BofA declined to comment.
“The agreement aims to strengthen Rogers’ presence in Western Canada and create a true national footprint for 5G,” said Butler. “The deal also provides Rogers with greater efficiency at scale from an operational standpoint.”
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According to data compiled by Bloomberg, junk bonds are at around $ 9 billion to make it the second busiest March on record. With more than $ 27 billion sold already this month, that could happen as early as this week, as more companies are expected to enter the market to lock in the low costs of borrowing.
Six companies tapped into the investment grade US bond market
Projections for the week are around $ 35 billion with a potential jumbo bond pending
Europe
Verizon Communications Inc. led a charge by issuers with a three-part offer, after its $ 25 billion sale in the United States last week. He also announced an agreement with Australia.
The European deal was one of 10 in the market, including sales by insurer Hannover Rueck SE and Barclays Plc of so-called level 2 debt that incurs losses before senior debt when a financial firm runs into trouble. sales, including Medical Properties Plus Inc. which is preparing a pound sterling deal, and Simon Property Group which will issue in euros CVC-owned retailer Douglas GmbH seeks to refinance bonds and loans with new debt backed by a cash injection equity of 220 million euros
Asia
Chinese group Fujian Yango was the only borrower to offer dollar bonds on Monday after issuance resumed in Asia last week.
Yield premiums on investment-grade dollar bonds in Asia ex-Japan and the cost of insuring them against defaults rose early in Monday after US Treasury yields rose on Friday. This week’s Fed policy meeting is a market priority
Spreads on the region’s high-quality dollar notes widened by around 2 basis points, credit traders said, as the 10-year US Treasury yield remained around a year, premiums high yields on Xiaomi’s dollar bonds were tighter by 2-3 basis points, credit traders said. , after a US court blocked a government investment ban on the company
(Updates with more details on the bridging loan in the 13th paragraph. An earlier version of the story corrected the attribution in the fifth paragraph.)
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