Fixed Income Quarterly—Telecom/Media/Cable
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tron acquired licenses in Quebec, southern Ontario, BC and Alberta; however, we do not anticipate the carrier will embark on an expansion of its wireless business, but instead hold the spectrum as an investment in the near term and evaluate the business case. The auction results did not alter the competi- tive oligopoly.
Increased Regulatory Risk – There continues to be heightened regulatory risk related to the government’s actions to pursue unbundled television channels and lower roaming rates as well as promote a fourth wireless carrier in each region.
Product Convergence – The growth of triple-play offerings and quad-play offerings will eventually weigh on pricing, margins and free cash flow over the next several years and serve to result in the convergence in operating performance of telephone and cable.
Shareholder-Friendly Actions – We are sensitive to the poten- tial for shareholder-friendly actions in this industry. Equity investors continue to pressure for increased returns of capital and higher increased dividends. We do not anticipate large borrowing to fund stock buybacks at this time because Cana- dian industry participants have clearly expressed their goal to maintain solid investment grade ratings; four companies have publicly articulated financial leverage targets (BCE, TELUS, Rogers and Shaw). However, we do see pressure on manage- ment teams to sustain high dividend payouts at the expense of higher leverage (Bell Aliant, MTS).
Manageable New Issuance Expected in 2014 – The sector’s aggregate funding levels in 2013 returned to record level of over $9 billion (including U.S. dollar financings), which was comparable to borrowing activity in 2009. Canadian dollar new issuance totalled $6.2 billion and U.S. dollar issuance was $2.9 billion. Notably, ~$2.4 billion of 2014 Canadian dollar bond maturities were redeemed early in 2013.
As a result of early refinancing activity in 2013, the bond ma- turity schedule in 2014 is relatively light with only $800 million Canadian dollar bonds and $1.1 billion of U.S. dollar bonds scheduled to mature. Thomson Reuters has C$600 million bond maturing in 2014 as well.
Possible M&A remains the perennial wild card for the industry debt issuance in 2014. Issuers could also get a step ahead on their 2015 bond maturities and refinance early in 2014 (C$2.6 billion and ~US$1 billion).
Our original estimate for sector new issuance in 2014 was in the range of $3 to $4 billion (including Thomson Reuters). However, Rogers tapped the market for $2 billion (including US$750 million) to help fund its wireless spectrum purchase, which was higher than we anticipated. As such, our full year
new issuance outlook is increased to the area of $5 billion. This level of new issuance should be readily absorbed into the market and remains constructive for secondary bond prices. Possible M&A and early redemption of 2015 bond maturities could pose a risk to our outlook.
Year-to-date 2014, there has been $3.8 billion new issuance from TELUS ($1 billion), Rogers ($2 billion) and Shaw ($800 million). We anticipate the pace of new issuance will slow in the remainder of the year with only MTS and Thomson expected to be issuing new bonds. We anticipate Thomson Reuters could issue in the range of $750 million to $1 billion and MTS in the range of $200 million to $250 million.
Subscription Video Services – The market is mature and growth is generally driven by population growth and household forma- tion. IPTV launches by TELUS (Optik TV) and Bell (Fibe TV) will continue to gain traction. Heavy promotional activity is expected to continue to make gains. IPTV platforms reached over 50% of Canadian households in 2012 compared to 10% in 2008. In 2012, total industry IPTV subscribers reached over 1 million, which was up 53% y/y. IPTV subscribers represented 8.4% of total broadcast distribution subscribers, compared to 2.1% back in 2008 (CRTC Monitoring Report 2013). We believe the telecom companies are strategically incentivized to continue aggressively pursuing market share in video to build scale. BCE’s IPTV customer base (FibeTV) nearly doubled to ~479K (~11% penetration of homes passed) at the end of Q4/13 as its rollout now covers ~4.3 million homes in Toronto and Montreal (targeting more than 5 million by the end of 2014 to ultimately reach 6 million households). While the current IPTV service offers a more compelling user interface for video compared to existing programming guides from cable, which are relatively dated, cable companies are beginning to respond with upgraded user interfaces.
Over-the-Top-Video (“OTT”) – While some young people creating new households may be doing so without the tradi- tional subscription TV services, North Americans still want and will still pay for the four pillars of subscription TV: live sports, news, reality TV and first-run drama and comedy, according to Deloitte Canada research. More than 99% of North American TV subscribers will continue to subscribe. If current conventional subscription TV service providers do not evolve with consumer behaviour and offer their own OTT services, the trends could be troubling in the longer term. We think the risk of disintermediation from over-the-top-video (a.k.a. cord cutting) services is manageable in the short term. More than 80% of Netflix Canadian customers also subscribe to cable or satellite services, according to Media Technology Monitor. In the short term, large vertically integrated broad-