Daily Management Review

Even while Threatened by a Fed Rate Hike, Cheap Money Raised by Canada’s Telecos in Internet Bet


Even while Threatened by a Fed Rate Hike, Cheap Money Raised by Canada’s Telecos in Internet Bet
The confidence of the Canadian telecom companies on the increasing customer appetite for internet service is growing and this has prompted such companies to make a rush to secure cheap money in order to fund acquisitions and big infrastructure projects to take advantage of the situation.
One example of this is the raising of C$1.5 billion ($1.2 billion) in debt this week by Canada's BCE Inc. however Bell is the name that this company is better known to its millions of internet and telephone customers. The company raised this amount to fund its takeover of a data center business and partly to pay down more expensive loans to further expansion and acquisitions.
However there is likelihood that this window to borrow for the Canadian companies could close down or become narrower if the U.S. Federal Reserve raises rates further this year. Rising of rate by the U.S. Fed wild conversely raise the cost of corporate borrowings for such companies which can deter them from picking up high vale loans.
Compared to other companies and corporate debt issuers that are similarly-rated such as oil and gas companies, strong earnings growth and free cash flow are produced by such Canadian companies like Bell and the country's other big operators and hence re a better bet for investors.

At this juncture when a large section of investors are facing otherwise dismal returns on government debt or stocks, stocks of Bell and the country's other big operators are attractive for them due to above qualities and their ability to turn bigger profits than more heavily regulated utilities.
"If you lose your job, the last thing you're going to give up is your cell phone," said Adrienne Young, portfolio manager and director of credit at Franklin Bissett Investment Management.
Desjardins analyst Maher Yaghi wrote on Thursday that cash flow is being boosted to the tune of about C$500 million a year at Bell, Telus Corp and Rogers Communications Inc due to the historically low borrowing costs. He increased target prices across the industry in addition to upgrading Telus to a "buy" recommendation.
With an average maturity of more than nine years, the annual pre-tax financing costs were pushed down to 4.56 percent at Bell which consequently got its best-ever rate on this week's debt. If the Fed starts hiking, that could be as good as it gets.
"This might be the bottom. If you're a CFO of a publicly traded company, you've got to be running the numbers right now to finalize acquisitions and raise debt," said Barry Schwartz, a portfolio manager at Baskin Financial.
The debt was raised by Bell partially to buy out its partners in Q9 Networks Inc. the company also wants to spend billions to upgrade its networks to deal with growth in mobile video and other internet-heavy uses and wants to buy regional telecom operator Manitoba Telecom Services.
Schwartz said  that investors will find telecom debt worthwhile, but not forever.
"At some point, people are going to rebel against it because the yields are just God-awful. But in the meantime there is insatiable demand for the internet and insatiable demand for fixed income," he said.

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