Fixed Income Viewpoint
Telecom/Media/Cable – April 2014
Sector Rating: Outperform Relative Value
5-Year: Outperform 10-Year: Market Perform 30-Year: Outperform
Spread View – We rate the sector Outperform based on solid industry fundamentals supported by generally growing revenue and EBITDA. We view ongoing regulatory issues as modestly negative but manageable for industry participants. Event risk appears low in the short term. New issue activity is expected to be manageable in 2014, which is a constructive factor for spreads. This high-beta sector remains sensitive to investor macro risk aversion.
Credit Curve – The 10s-30s curve continues to be one of the steepest in our universe. The sector’s 10s-30s curve widened slightly in Q1/14 to ~49 bps from ~45 bps at December 31, 2013. The 5s-10s curve flattened to ~50 bps from ~52 bps in Q4/13. We think the long end of the curve is attractive. The nature of the long-term fundamental risks in the sector (technology, regulatory and M&A risks) likely deters some investors from extending further out the curve.
Sector Value – With average spreads of 114 bps in the 5-year term and 212 bps in the long end, the sector still offers a good pick-up in spread over other sectors, although not as attractive as in prior years. Spread of 164 bps in the 10-year term is rich relative to other sectors.
Recommendation
Top Pick – Our top pick is TELUS whose bonds are generally reasonably valued. The company has the best-in-class balance sheet and good earnings prospects led by its strong wireless segment.
Risks
External – Modest GDP and consumer spending growth fore- casts still support telecom services. BMO Economics forecasts GDP to grow in the area of 2.3% in 2014 (2.0% 2013) and consumer spending growth to pick-up slightly to 2.5% (2.2% 2013). The 2009 recession demonstrated the resiliency of the sector, supported by the essential nature and affordability of communication services.
Trading Liquidity – Liquid- ity improved over the past three years with over ~$33 billion issuance. Bell Cana- da and TELUS are the most liquid.
New Issuance – We expect moderate new issuance in 2014 in the area of $5 billion. With year-to-date issuance of $3.8 billion, including U.S. dollar issuance, we anticipate another $1.0 to $1.3 billion of issuance in the remainder of 2014.
Trevor Bateman, CPA, CA, CFA
BMO Nesbitt Burns Inc. trevor.bateman@bmo.com (416) 359-8238
Other – There is heightened
regulatory risk as the government is focused on lowering wireless roaming fees, promoting a fourth wireless carrier and pursuing the unbundling of television channels.
Credit Profile
Sector Financials – Industry revenue and EBITDA are expected to grow at a low-single-digit rate, which supports positive free cash flow. Leverage has risen modestly for some issuers due to the spectrum auction and M&A activity, but remains in manageable levels. Management teams generally strive to grow dividends and return capital to shareholders while nurturing solid investment grade balance sheets.
Sector Fundamentals – Wireless sector fundamentals remain intact following the 700 MHz spectrum auction. However, regulatory risk has risen as the federal government plans to continue to aggressively pursue policies that ensure consumer interests are at the core of all government decisions. Wireline business conditions have shown some improvement but re- main sensitive to cable competition, wireless substitution and the overall economy. Cost cutting remains important in light of declining voice revenues. The core cable business model is evolving from the sale and bundling of discrete products (video, data and voice) to the enabling of broadband.
Credit Ratings – We expect ratings to be generally stable in the near term. Rogers DBRS credit rating of BBB remains curiously at the same level as that of Bell Aliant, Manitoba Telecom and Shaw Communications.