Canada’s top telecoms taking action to address debt elephant in the room
Canada’s four largest telecoms have become increasingly weighed down by a key metric they have relied upon to build their businesses: debt.
At the end of 2000, Canada’s largest four telecoms – Rogers Communications Inc., Bell Canada parent BCE Inc., Telus Corp. and Freedom Mobile owner Quebecor Inc. – together had about $20-billion in long-term debt, when including the long-term portion of lease costs.
Fast-forward to today, and that amount has quintupled to more than $100-billion, data from S&P Capital IQ shows.
As intense competition between the large carriers coincides with slower overall sector growth, that debt has become difficult to ignore. The telecoms have made aggressive plans to reduce leverage, and have been offloading assets, turning to joint ventures and cutting dividend payouts to reduce the strain.
While the total amount of debt matters, the ratio of a company’s debt load to its earnings is even more important.
After a decade of decline in the 2000s, the telcos’ debt-leverage ratios began steadily creeping back up around 2010. (This ratio is typically calculated in the telecom sector as net debt divided by EBITDA, or earnings before interest, taxes, depreciation, and amortization. Capital IQ uses unadjusted numbers and includes leases.)
The telecom sector typically aims for a ratio of about three times net debt-to-EBITDA. As of the end of the last quarter, Rogers’s ratio was 4.3, Telus’s was 3.8, BCE’s was 3.5 and Quebecor’s was 3.2, although each company calculates and adjusts this figure slightly differently.
Business debt is not inherently negative. When used strategically, debt can be used to invest in growth, generating more in profit than the cost of the debt itself. It is often a cheaper source of capital than issuing equity, and sometimes carries tax advantages
Some level of debt is typically considered smart asset allocation, especially in capital-intensive industries where companies must spend to build expansive infrastructure.
But if a company’s growth is slowing, or costs are rising quickly, too much debt can put executives in a corner.
“There was always this mentality that with a stable cash flow, it’s okay to have a lot of debt,” said Sean McDevitt, who leads the North American telecom practice at Boston-based consultancy Arthur D. Little.
“The minute the growth starts to slow or the profitability starts to suffer,” he said, “the more of a focal point” it becomes.
The carriers’ debt leverage started to rise from steady levels around 2010, after the financial crash which made taking on new debt a cheaper way to fund capital spending.
Costs grew as the federal government began setting aside portions of spectrum – the airwaves used for wireless communication – for new market entrants. This forced the country’s largest players to bid more aggressively as consumer demand for data surged, pushing up prices for the remaining portions. (For instance, as of the end of last year, spectrum acquisitions increased Telus’s debt ratio by approximately 0.5, to a total of 3.9 times net debt-to-EBITDA, excluding some costs.)
Major mergers and acquisitions also pumped up debt levels, the largest of which being Rogers’ $20-billion takeover of Shaw in 2023. And when Telus bought health care company LifeWorks for $2.3-billion in 2022, the largest of its recent spate of acquisitions, it also took on $600-million in debt.
And for BCE and Telus came the expense of building out extensive fibre and 5G networks – generational layouts that cost tens of billions – in response to the Rogers-Shaw merger.
This weighed particularly heavily on BCE’s dividend payout ratio – the amount of free cash flow it spends on dividends – pushing it over 100 per cent. And the company plans to use the proceeds from the pending sale of its stake in Maple Leaf Sports and Entertainment to buy U.S. company Ziply Fiber, instead of paying down debt as it initially said it would.
Higher interest rates in recent years also made maintaining debt more expensive. At the same time, macroeconomic changes such as pricing competition between the carriers and slower immigration – and so fewer new customers – mean that earnings growth is slowing.
“It is hard to convince investors to pay up for acquired growth when the base business is showing weak growth and leverage is elevated,” said Bank of Nova Scotia analyst Maher Yaghi in an April note to investors.
But the trend of rising debt is taking a turn. BCE, Rogers and Telus have all stated that reducing debt leverage and balancing their financial sheets are their top priorities, targeting ratios of between 3 and 3.5 in the next few years, and have taken aggressive measures to get there.
This includes selling assets. Rogers is in the process of selling a $7-billion stake in its broadband network, Telus is seeking to sell a minority stake in its towers as well as copper and real estate, and BCE has identified billions in non-core assets that could be offloaded in addition to its sale of Northwestel Inc. for $1.3-billion. BCE also cut its dividend by more than half last week.
In addition, the companies have issued new debt in recent months to pay down earlier issues and improve their financial flexibility.
But the challenge for the companies is not so much their ability to pay down debt as it is about maintaining their investment grade credit status, analysts say. Maintaining that status means a lower cost of capital, wider access to capital markets, and stronger market confidence.
Credit raters have been downgrading the companies in recent years, reducing their debt ratings close to junk. Were the telcos to lose their investment-grade status, some bondholders would be forced to sell, heaping more pressure on the companies’ debt.
“Competitive headwinds, a pro-consumer regulatory framework, and high leverage have induced companies to pursue different strategic plans as they strive for healthy balance sheets,” said bond rater S&P Global in a memo in January.
“Effectively deploying such strategies will not only determine their performances for 2025, but also shape the companies’ success in lowering leverage – failing which, ratings pressure could increase.”
This article was first reported by The Globe and Mail
