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Telus shares tank as its debt rating cut to junk status
Plummet 24% as investors question future finances
Tyler Hamilton Technology Reporter
Telus Corp., a long-standing symbol of corporate strength in Western Canada, was shaken to its core yesterday after Moody's Investors Service downgraded the company's debt rating to junk status. Shares in Burnaby, B.C.-based Telus plummeted nearly 24 per cent as panicky investors reacted to the downgrade, which questions the ability of Canada's second-largest phone company to generate enough cash in the next two years to make meaningful payments on its debt.
Telus has about $9 billion in debt, half of it relating to the fall, 2000, purchase of Clearnet Communications Inc. The acquisition gave Telus a much-needed national presence in the wireless market, but the high price of the transaction is now haunting the company's balance sheet.
Chief executive Darren Entwistle has reduced Telus' dividend, lowered capital expenses, unloaded non-essential real estate and sold off a directories business during the past 18 months to improve cash flow. Earlier this month, Entwistle announced a plan to slash Telus' workforce by 23 per cent, or about 6,500 positions, either through jobs cuts or voluntary departure and retirement. Moody's said the moves, while a critical step in the right direction, may not go far or fast enough and too many risks lay ahead for the debt-laden telephone company, which is to report its second-quarter financials on Monday. "Telus will incur negative free cash flow this year and likely next," the New York debt-rating agency said in a statement. "The outlook is negative as Moody's believes that the company has execution risk on its downsizing program and its broader business plan." Company stock fell $2.15 to $7 on the Toronto Stock Exchange.
Moody's cut the senior unsecured rating of Telus from Baa2, an investment grade, to Ba1, considered a speculative or "junk" rating. "Moody's will closely monitor Telus' progress, and shortfalls to Moody's expectations may lead to a further lowering of the senior unsecured rating," the agency said. The downgrade comes a month after Dominion Bond Rating Service cut Telus's debt rating to just above junk. Investors were expecting the Moody's downgrade, but they were caught off guard yesterday by the two-notch reduction. A junk rating makes it more expensive for a company to borrow money. Some investment and pension funds are prohibited from holding the debt of such companies.
Telus put on a brave face after the announcement. "We're obviously disappointed with the decision and think it's unwarranted," said spokesperson Nick Culo. "But the operating impact is minimal. This doesn't affect our borrowing available on our bank facilities, and Telus does not have an intent to borrow in the public debt market, so there's no near-term impact."
Culo added that Moody's is only one of four debt-rating agencies that have lowered Telus to junk status based on its current business plan. "Three out of four consider us well into investment grade," he said. But analysts were less optimistic. "This is very, very bad," said one analyst, who asked not to be named. "Telus is totally reliant now on bank financing, and the banks are going to be very nervous following this downgrade." He said the banks are likely to pressure Telus to raise funds by selling assets or equity. Problem is, Telus has already sold off most of its non-core assets and an equity issue would dilute existing shares, causing the stock to fall even further. "The dividend may have to be cut even further," he added. Dvai Ghose, an analyst with CIBC World Markets in Toronto, said Telus is a strong incumbent that can likely weather the storm, but the downgrade could put it in a crunch if it needs to raise funds. Ghose said a plan to raise cash by securitizing accounts receivable could be cancelled if other debt-rating agencies lower the company to junk. The company is coping with two unfavourable regulatory decisions and a slowdown in the telecommunications market. It has also failed to make significant inroads in eastern Canada. Perhaps the largest question mark is Telus' union battle as it tries to cut its staff.
If it can get past its workforce challenges, it could easily become one of the best stocks next year, said Ghose. |
