Rogers bets big on credit markets in $ 16 billion Shaw deal


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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 high-stakes 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, which was the sixth largest supply of high-quality securities in the United States, sparked demand at its peak of $ 109 billion.

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

Canada is expected to launch an auction of 3,500 MHz spectrum 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. Leverage will decrease over the next three years to 3.5 times, which will allow them to maintain a top-notch credit rating, Rogers CFO Tony Staffieri said on a conference call. following the announcement of the agreement.

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“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 handle high leverage well, 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 important cash consideration indicates very high 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 anticipates over the next two years present a high risk. In our view, the high leverage significantly limits the financial flexibility of the company if the increase in EBITDA from synergies is delayed, ”S&P’s Aniki Saha-Yannopoulos said in a statement 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.”

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Rogers’ $ 1 billion 3.7% bond due 2049 was among the biggest declines in the U.S. investment grade bond market on Monday, widening 143 basis points higher than Treasuries, up from around 126 at the end of last week, according to Trace pricing.

“We are confident that we can aggressively reduce this debt-to-equity 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 most recent closing price. Efficiency gains can come from optimizing the resulting corporate debt profile, said John Butler, analyst at Bloomberg Intelligence.

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

Bank of America is also providing the company with a C $ 19 billion bridging loan to fund the transaction, according to people with knowledge of the matter. The transaction, one of the largest single-source M&A loans made 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 mix of bonds and term loans 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 establish a true national presence for 5G,” said Butler. “The deal also offers Rogers greater operational efficiency of scale. “

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Junk bonds are at around $ 9 billion making it the second busiest March on record for the show, according to data compiled by Bloomberg. With over $ 27 billion already sold this month, it could happen as early as this week and more companies are expected to enter the market to lock in low costs of borrowing.

Six companies tapped into the US investment grade bond market Projections for the week are for around $ 35 billion with a potential bond outstanding.

Europe

Verizon Communications Inc. led a charge by issuers with a three-part bid, following its massive $ 25 billion sale in the United States last week. He also announced an Australian deal.

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The European deal was one of 10 in the market, including sales by insurer Hannover Rueck SE and Barclays Plc of so-called Tier 2 debt which suffers 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 Asian non-Japanese dollar bonds and the cost of insuring them against default rose early in Monday after US Treasury yields surged on Friday. A key market target is this week’s Fed policy meeting. indicated a 2-3 basis point tightening, credit traders said, after a US court blocked a government investment ban on the company

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