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Fixed Income Quarterly—Telecom/Media/Cable
Viewpoint
We maintain our Outperform rating on the sector. We expect Industry fundamentals to continue to be supported by the competitive oligopoly dynamics in Canada and look for mod- est revenue and earnings growth, driven mainly by consumers’ insatiable demand for wireless data consumption as smart- phone adoption continues to rise. The near-term visibility on event risk, or at least known event risk, is benign.
Near term, bonds will be driven largely by sector-specific issues (700 MHz network deployment, wireless competition, M&A, regulatory change, revenue mix shifts, technology evolution and increasing IPTV competition), which have become more significant influencing factors over the past year. Nonethe- less, bonds remain vulnerable during periods of “risk-off” sentiment.
Outperformance in Q1/14: The high-beta “communications” sector’s bonds outperformed the FTSE TMX Canada Universe Corporate Bond Index in the first quarter on a broad basis due to strength in the long end. In the short end, the sector’s total return of 1.34% was in line with the FTSE TMX Canada Universe Corporate Bond Index total return of 1.39%. In the mid term, the sector’s total return of 4.07% was slightly higher than the universe total return of 3.85%. In the long end, the sector’s total return of 6.93% significantly outperformed the universe total return of 6.06%.
Mixed Performance in 2013: The sector’s bonds slightly under- performed the FTSE TMX Canada Universe Corporate Bond Index in 2013 on a broad basis, which was largely attributable to the uncertainty during the “summer of Verizon” concerns. In the short end, a total return of 2.34% was slightly below the FTSE TMX Canada Universe Corporate Bond Index total return of 2.40%. In the mid term, the sector’s total return of 0.26% underperformed the FTSE TMX Canada Universe Cor- porate Bond Index total return of 1.06%. However, in the long end, the sector’s total return of negative 0.16% significantly outperformed the FTSE TMX Canada Universe Corporate Bond Index total return of negative 3.20%.
TELUS Our Favorite Carrier: TELUS has the strongest bal- ance sheet, although we anticipate leverage will creep slightly higher in 2014 to ~2.3x from 2.1x (December 31, 2013) on the back of its $1.1 billion cash outlay for 700 MHz spectrum and its NCIB activity. The company is the best-in-class operator reflected by consistently leading financial performance. The wireless segment is expected to generate solid revenue and EBITDA growth in 2014, which supports consolidated rev- enue and EBITDA growth. TELUS has no scheduled bond maturities in 2014. On April 1, 2014 TELUS launched a
Chart 1: Telecommunications: 10-Year Indicative Spreads bps
700 600 500 400 300 200 100
0
Dec-03 Dec-05
Dec-07
Dec-09
BCE / Bell Canada
Bell Aliant Manitoba Telecom TELUS Corp.
Dec-11 Dec-13
Source: BMO Capital Markets As at March 31, 2014
Chart 2: Cable: 10-Year Indicative Spreads bps
450 400 350 300 250 200 150 100
50
Rogers Communications Shaw Communications
0
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
Source: BMO Capital Markets As at March 31, 2014
two-tranche bond offering of $1 billion to help fund its wire- less spectrum purchase.
Key Themes
Spectrum Auction – Industry Canada’s 700 MHz spectrum auction was completed in February 2014 and generated over $5 billion proceeds. Rogers spent the most, $3.3 billion, acquir- ing 22 paired licenses, and arguably gives the carrier a network advantage in terms of capacity and operating costs. TELUS spent $1.1 billion to acquire 16 paired block licenses and 14 unpaired block licenses. BCE spent $566 million to acquire 17 paired block licenses and 14 unpaired block licenses. Video-