(Bloomberg) – To finance the acquisition of a smaller rival for $ 16 billion, Rogers Communications Inc. plans to increase its debt to a level so high that weaker companies are at risk of being reduced to waste. It is a high bet that the Canadian telecommunications company will be able to cut costs and repay its loans quickly after the acquisition of Shaw Communications Inc.
The company expects credit demand to remain strong after Verizon Communications Inc. sold $ 25 billion in bonds to help finance purchases of 5G radio waves last week. The sale of the debt, which represented the sixth largest offer of high-quality bonds in the United States, generated $ 109 billion in peak demand.
Rogers is always looking for opportunities to refinance his debt and this will continue “either outside or inside this transaction,” said CEO Joe Natale. The timing of the merger was helped by favorable capital markets, he added. “The bridge financing we have already received and the interest we have in terms of financing this transaction has been immense.”
Canada is expected to start a 3500 MHz spectrum auction on June 15, a key component in the expansion of 5G telecommunications services. In the United States, a race by communications giants Verizon and AT&T Inc. to buy 5G wireless radio waves added billions of dollars to the flow of corporate bond sales.
The combined Rogers / Shaw leverage ratio is expected to be just over five times the debt to earnings before interest, taxes, depreciation and amortization, which could put pressure on current credit ratings. Leverage will decline over the next three years to 3.5 times, allowing them to maintain an investment-grade credit rating, Rogers chief financial officer Tony Staffieri said in a conference call after the deal was announced.
“North of five times the Ebitda debt is an exceptionally high leverage ratio to see in the investment grade space. But if anyone knows how to handle high levels of leverage well, it’s Rogers. ”Said Randy Steuart, portfolio manager at Ewing Morris Investment Partners. “Rogers is no stranger to using leverage intelligently and this consideration with a lot of money indicates very high confidence in the company’s deleveraging path.”
Rogers is rated BBB + by S&P Global Ratings, two levels above Shaw Communications. The rating company put Rogers on alert for a possible downgrade on Monday, while Fitch Ratings put its BBB + score on a negative alert and said the downgrade would likely be limited to one step.
“There is a high risk for the C $ 1 billion synergy benefits that RCI expects for the next two years. In our opinion, the high leverage significantly limits the company’s financial flexibility if the increase in Ebitda of synergies is delayed, ”said Aniki Saha-Yannopoulos of S&P in a statement on Monday. “As a result, we see credit metrics aligned with the weaker end of the ‘BBB’ category and we believe they can lead to a downgrade of two degrees.”
Rogers’ $ 1 billion of 3.7% bonds due 2049 were among the biggest declines in the U.S. investment-grade bond market on Monday, increasing to 143 basis points more than bonds Treasury compared to around 126 at the end of last week, according to Trace’s prices.
“We have a high degree of confidence that we can work aggressively to reduce the debt / leverage ratio,” said Staffieri. The company’s management spent “a lot of time” with the credit rating companies last week, guiding them on their financial models, he said.
The cash offer of $ 40.50 a share is supported by Shaw’s board, the companies said on Monday. The proposal represents a 69% premium over Shaw’s most recent closing price. Efficiency may come from optimizing the resulting company’s debt profile, said Bloomberg Intelligence analyst John Butler.
Rogers hired BofA Securities and Barclays Plc from Bank of America Corp as its financial advisors for the transaction, while Shaw hired TD Securities Inc.
Bank of America is also providing the company with a $ 19 billion bridge loan to finance the deal, according to people familiar with the matter. The transaction, one of the largest single-source M&A loans provided in Canada, will be syndicated, people said, who asked not to be identified because the details are private. The loan can be refinanced with a mix of bonds and term loans in currencies that include Canadian and US dollars, one person said.
A BofA representative declined to comment.
“The deal aims to increase Rogers’ presence in western Canada and build a real national footprint for 5G,” said Butler. “The deal also offers Rogers greater scale efficiency from an operational point of view.”
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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, this could happen as early as this week, with more companies expected to hit the market to curb low borrowing costs.
Six companies explored the US investment-grade bond market
Projections for the week are about $ 35 billion with a possible jumbo title in progress. For business updates, click here for the New Issue Monitor For more information, click here for the Credit Daybook Americas
Europe
Verizon Communications Inc. led a lawsuit with issuers with a three-part offer, following the sale of $ 25 billion in the United States last week. It also announced an Australian deal.
The European transaction was one of ten in the market, including sales by insurer Hannover Rueck SE and Barclays Plc of the so-called Tier 2 debt that suffers losses before senior debt when a financial company faces problems. There were several issuers hiring banks ahead of the likely title sale, including Medical Properties Plus Inc., which is preparing a sterling deal, and Simon Property Group, which will issue eurosCVC, retailer Douglas GmbH is trying to refinance bonds and loans with new debt supported by a capital injection of 220 million euros
Asia
China’s Fujian Yango Group was the only borrower offering dollar bonds on Monday after issues in Asia increased last week.
Yield premiums on Asian investment-grade dollar bonds, except Japan, and the cost of insuring them against default increased early on Monday’s trading session after US Treasury yields skyrocketed on Friday. market. This week’s Fed policy meeting is an important focus of the market
Spreads on high-grade dollar banknotes in the region increased by about 2 basis points, according to credit traders, as the 10-year U.S. Treasury yield remained at around 1 year. , after a U.S. court blocked the government’s investment ban on the company
(Updates with more details on the bridge loan in the 13th paragraph. An earlier version of the story corrected the assignment in the fifth paragraph.)
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