Fitch Downgrades Rogers Wireless to 'BB+'; Stable Outlook

Business Wire, Nov 12, 2004

NEW YORK -- Fitch Ratings has downgraded Rogers Wireless Inc. (RWI) senior secured debt rating to 'BB ' from 'BBB-'. Additionally, Fitch has assigned a 'BB ' rating to RWI's proposed senior secured notes offering and a 'BB-' rating to the proposed senior subordinated note offering. Proceeds from the offering will be used to provide long-term financing at Rogers Wireless following the recent transactions with AT&T Wireless (AWE) and Microcell Telecommunications (Microcell). Initially, the transactions had principally been funded by the parent, Rogers Communications Inc. The Rating Outlook is Stable.

The rating downgrade primarily reflects the substantial increase in financial risk at Rogers Wireless due to the significantly higher debt levels at the company following the C$1.6 billion acquisition of Microcell and the C$1.767 billion acquisition of AWE's stake in Rogers Wireless. Leverage is expected to increase to approximately 5.5 times (x) by the end of 2005, compared with 2.3x at the end of the third quarter of 2004. This rating action also acknowledges the negative near-term impact these transactions will have on free cash flow and liquidity of Rogers Wireless.

However, Fitch expects rapid improvement in Rogers Wireless credit profile in 2006 through debt reduction and cash flow growth. Expectations are for increased free cash flow generation due to the decline of one-time costs associated with the Microcell network conversion, a reduction in capital spending requirements, and the increase in net additions driving profitable revenue growth. By the end of 2006, Fitch expects debt-to-EBITDA to be 3.5x or less.

In addition, further rating support is derived from wireless industry fundamentals, which should enable Rogers Wireless to continue solid top line growth and margin expansion over the medium term. During the first three quarters of 2004, total revenue and EBITDA growth increased 17% and 30%, respectively, for the national operators. Industry growth was driven by a material increase in ARPU (5%) and a solid increase in net additions (20%) from one year ago. Industry churn continued to be low at 1.7%, particularly when compared with U.S operators at 2.3%. Consequently, EBITDA margins increased to 39% for the first three quarters of 2004, a 400 basis point improvement from one year ago. With relatively low industry penetration rates (Canada lags the U.S by approximately 10%), Fitch believes good opportunities exist for the three national operators to acquire their fair share of subscribers leading to healthy revenue and cash flow growth prospects.

With the Competition Bureau approving the proposed acquisition of Microcell by Rogers Wireless, the transaction offers Rogers Wireless several important longer term strategic benefits, including the increased scale of operations as the only global system for mobile communications (GSM) operator in Canada, 30 MHz of additional nationwide spectrum, improved share in certain regions and market segments, and the opportunity to utilize Microcell tax losses. Fitch expects network integration should be materially complete by the end of 2005.

The initial financing for the acquisition of AWE's stake in RWI included a C$1.75 billion secured bridge financing at Rogers Communications Inc. To finance the Microcell transaction, RWI used a significant drawdown on the company's C$700 million secured bank credit facility, intercompany subordinated debt and cash. Proceeds from the proposed debt issuance will be used to refinance all of the transactional related debt at Rogers Wireless. For Rogers Wireless to distribute the C$1.75 billion resulting from the AWE transaction back to RCI, the company could utilize a couple of different methods, including a dividend distribution or an issuer bid.

To ensure enough cushion under its bank and public debt covenants, RWI will issue a mix of secured and subordinated debt securities. Additionally, RWI had negotiated changes to the covenants in the secured bank credit facility. RWI's senior debt to cash flow ratio increased from 4.5x to 5.5x, as well as total debt to cash flow, from 5.5x to 6.5x. RWI and its bank lenders also amended a two-year extension to the maturity date and the reduction schedule so that the bank credit facility now reduces by $140 million on each of April 30, 2008 and April 30, 2009 with the maturity date of April 30, 2010.

On Nov. 11, 2004, RCI disclosed that it will launch a tender offer for all of the outstanding Rogers Wireless Communications Inc. (RWCI) class B restricted voting shares (RWCI class B shares) owned by the public in exchange for 1.75 Rogers Communications Inc. class B nonvoting shares for each RWCI class B share held. The shares held by the public represent approximately 11% of RWCI's equity interest. Fitch believes this is a modest long-term positive for Rogers Wireless, given that it will be done with equity and removes the risk that the public stake outstanding would have been repurchased through the use of debt or free cash flows.