DBRS Limited (DBRS Morningstar) confirmed TELUS Corporation's (TELUS or the Company) Issuer Rating and the rating of the Company's Notes at BBB. DBRS Morningstar also confirmed TELUS’ Commercial Paper rating at R-2 (middle) and the rating of TELUS Communications Inc.’s Senior Debentures at BBB. All trends remain Stable, reflecting the Company's industry-leading earnings growth, which continues to be supported by heavy investments in its fibre-optic network as well as the continued growth and diversification of its non-telecommunications businesses. The rating confirmations reflect double-digit earnings growth in the last 12 months that was in line with DBRS Morningstar's expectations. The ratings continue to be supported by TELUS’ well-entrenched market position and proven track record of profitable growth, while also reflecting intensifying competition, risks associated with regulatory and technological change, as well as the industry’s capital-intensive nature.
TELUS posted solid operating performance in 2022 and Q1 2023 that was in line with expectations. Looking ahead, DBRS Morningstar forecasts consolidated revenues and EBITDA to increase in the high-single-digit to low-double-digit range over its forecast horizon, reflecting the expansion of 5G coverage, a growing subscriber base, the impact of recently acquired businesses, and organic growth in non-telecommunications businesses, in addition to cost-saving initiatives and the transition to a fibre-optic network from a legacy copper network. DBRS Morningstar’s outlook, however, is partially offset by rising compensation expenses and a softening economic environment.
DBRS Morningstar believes TELUS’ financial profile will remain adequate for the current ratings over the near to medium term as the Company continues to balance growth in its telecommunications and non-telecommunications businesses and investment in its Canadian network. DBRS Morningstar expects TELUS to be able to absorb near-term cash flow pressures related to asset integration, growth in the digital offering, and the acquisition of C-band and mmWave spectrum licences.
Although debt balances are expected to be moderately higher year over year (YOY) in 2023, DBRS Morningstar anticipates 2023 leverage to be essentially flat YOY at 3.88 times (x), owing to contributions from new acquisitions and organic EBITDA growth in both the TELUS technology solutions and TELUS International segments, and anticipates gross leverage to trend toward 3.0x by YE2025.
A positive rating action may occur if TELUS is able to deleverage as a result of high-single-digit to low-double-digit EBITDA growth and/or liquidity events in which the proceeds are directed toward debt reduction such that leverage declines to approximately 3.0x while balancing capital allocation between growth, investment, spectrum, and shareholder returns, and if the Company shows the willingness, ability, and execution to achieve its long-term leverage target of 2.50x to 2.75x.
Conversely, a negative rating action may occur if TELUS experiences soft operating performance that falls materially below current expectations and pursues more aggressive financial management such as aggressive shareholder returns, accelerated debt-financed acquisition activity, or a combination of these factors such that leverage is expected to be sustained above 3.75x.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
DBRS Morningstar applied the following principal methodology:
-- Rating Companies in the Communications Industry (July 21, 2022)
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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