A bond writing agency called Moody’s had downgraded TELUS credit rating. The action itself had effect of Can$ 6.4 Billion in debt. The Moody’s came to this eventual debt rating by the means of largely unexpected notches from investment grade to speculative grade. The concerns Moody’s had on this rating action was that TELUS was going to experience negative cash flow which would damage its ability to pay the debts until 2004. Robert Mc Farlane, who was the then CFO of he TELUS Corporate had immediate steps to counter the situations. In this paper its apt to have greater look at how the TELUS capital structure is in comparison with other telecoms and asses little bit on TELUS financial condition. Then we will also look into the specific actions could be taken by Mc Farlane to assure investors.
The TELUS capital structure compared with others.
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Firstly let us look into the situation before the competition period. There were companies which provided telecommunication cervices as their monopoly. These companies were dominating the industry. They were the companies called Incumbents. In the year 2001, 78 percent of industry revenues were to the credit of these provincially based or regionally based incumbents. And the smaller ones served less densely populated municipalities. As the time went on the competition had also increased and adding to the woes was the intervention of CRTC (Canadian Radio-television and Telecommunication Commission), which is the independent agency responsible for regulating Canada’s broadcasting and telecommunication industry, in the year 1990 and 1992, life has become harder for the telecommunication giants.
TELUS was formed in the year 1999 with the merger of two firms, they are namely the Alberta based TELUS and BC TELCOM. In July 2000 TELUS had established a new strategic intent which was supported by six strategic imperatives. In this, they stressed significantly on the contemporary demand of business that is voice and wireless on the IP platform. The firm have decided to relentlessly focus on data, voice, IP and wireless growth.
So TELUS began to invest significantly on a national fiber-optic network. They have invested $6.6 billion in acquisition of Clearnet Communications and acquired a 30 percent in Quebec Tel. It was a time when other telecommunication companies were finding the long-distance less attractive and they were all in pursuit of the same cause that is the possibilities of IP voice communication. The capital investment in the industry was expected to accelerate at that time. It is important to remember that 2000 was the year when the dot com companies had a collapse. In the following year the 9/11 tragedy brought the market further down. TELUS began to enjoy wider attention with the Clearnet acquisition which was done with the arrangement of debt from consortium Canadian banks. And now, TELUS had stated publicly that it indented to reduce its debts to capital ratio within almost three years of its Clearnet acquisition. During 2000 and 2001 merger investment was made to digitalize and upgrade its western Canadian cellular system. The year 2001 seemed to be the peak year of capital investment. They spend $2.6 billion almost the 375 of their revenue that year. They company had in mind that, unlike the other giants, they have invested handsome capital up in front that they capital investment in the years to follow would be reduced. And that would be roughly 15 to 20 per cent of their annual income.
They also raised money by selling its yellow pages to Verizon and selling a small leasing company and some real estate. TELUS initiated a phased operational efficiency program a non-cash restructuring charge of $198.4 million was recorded in the first three months of 2001. Meanwhile TELUS arranged a 2.5billion bank credit facility and raised more than can$6.4 billion in multi year public debt. After a year TELUS faced a problem in renewing the $2.5 billion credit due to the bankruptcy of many in the industry including Teleglobe. In few weeks the TELUS has increased its accounts receivable securitizing.
TELUS financial condition & the positive and negative changes.
Following the Clearnet and other acquisition, TELUS net debt as percentage of total capital increased to 58.6 per cent by 2002.TELUS stock prices fell from $16.67 to $10.40 in 2002 April to July. As a matter of fact the dividend re investment program was dropped from 47 per cent to 10 per cent. The employee stock purchase program had also been declined at this juncture. This can be termed as one of the worst negative change happened. Meanwhile increasing their accounts receivable securitizing program from $150 million to $500 million has given them more liquidity. $350 million which was the net sale proceeds were used to pay debts and that showed in a way even if all their plan of reducing expenses work out the company would have the same debt as it had in the previous year. But continuing in the same operation for another three years would get the company into a position where it could bring the debts down.
Inn 2002, before the Teleglobe bankruptcy the Moody’s have informed TELUS that there would not be a one notch downgraded rating. And even in the beginning of the month of June the Moody’s have stated that the TELUS’ rating out look was stable, but not even a fortnight passed when the Moody’s placed TELUS’ rating under review for a possible down grade. IN fact Moody’s cited several concerns in their rating such as TELUS credit being non-investment grade with a suggestion of another down grade in the future was distinctly possible.
Considering the fact that after Moody’s announcement was made the TELUS prices experienced one of the most dramatic declines in pricing for an investment grade credit. Moreover three of the other credit rating companies have rated them, recently, well in to the safer zone for the investors. One must, therefore, think that Moody’s can guess more than analyze. It gives a slight impression that Moody’s rating was inappropriate and biased.
The specific actions to be taken.
It’s the time when Mc Farlane should stick to the basics. The goal he has before him is to keep up with the objectives of TELUS financing plan.
He needs to install confidence in the board and in the large number of staff about the fact that while the current levels missed the liquidity target by almost a $100 million, the predicted comfortable surplus over the target by 2003 is solid. Which would help the employee stock purchasing program to pick up. And that statistics would have a telling effect on the public investors. With the completion of the increased accounts receivable securitizing program the cash flow was definite to turn positive by 2003. He could stick to the plan and bring it fruitful.
He would be needed to go all out make the plan he had with his treasuries a week earlier. Because that would bring immediate change and confidence. He could always make the executives and the board convinced about the future prospects and use a portion of the liquidity in purchasing. At the same time sell the share with a small discount to the employees.
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