Invesco Fixed Income (IFI) team comments on the recent Canadian government auction of 3500 MHz spectrum to telecom companies and the impact it will likely have on telecom debt issuance.
The Canadian government’s 3500 MHz spectrum auction ended on July 23, 2021, and the results are in: $8.9 billion1. That is the combined amount that bidders have agreed to pay the Canadian government for the right to use this spectrum. The biggest spenders were Rogers Communications ($3.3 billion), Bell Canada ($2.1 billion) and TELUS ($1.9 billion), as shown in the table below.2
5G is the reason 3500MHz spectrum is so valuable to these companies. 5G networks represent an evolution in wireless technology and the promise of faster speeds, more reliability, and increased availability, among other things.
If a wireless company wants to compete in 5G, they need the right spectrum. It turns out that the 3500 MHz spectrum is well suited for this purpose given its combination of coverage (how far data can be sent) and capacity (how much data can be sent).
Not only is spectrum strategically important, but this auction represented an almost once-in-a-lifetime opportunity to get this specific band. So, it makes sense that companies would be willing to pay up. We say “almost” because, technically, the spectrum licenses are valid for 20 years, but the Canadian government has said that license holders will have a “high expectation” of being able to renew for another 20-year term except in exceptional circumstances.3
The market reaction to the news was muted. While auction results came in much higher than the initial expectations of $3 to 4 billion before bidding started, the final results were aligned with news reports during the auction phase that suggested bidders were being aggressive.
Spreads on intermediate-term Canadian dollar bonds for Rogers, BCE and TELUS were anywhere from flat to 5 basis points wider4, with the biggest move in Rogers’ bonds given that its incremental debt capacity is already somewhat stretched given its pending acquisition of Shaw.
Speaking of debt, we expect to see a wave of issuance of Canadian telecom debt as winning bidders fund their purchases5, like what we saw in the U.S. following the C-Band auctions earlier this year (but with a much smaller magnitude).
In the near term, that new issuance could weigh on Canadian telecom spreads but could likely offer attractive opportunities to add exposure when new bonds are issued, particularly if they are accompanied by credible deleveraging commitments from the issuers.
Among the companies above, we view TELUS as the best positioned from a fixed-income perspective as it has already raised funds this year through an equity offering and hence are least likely to issue additional debt6. Rogers is expected to be the largest issuer in the near term since, as mentioned above, it will need to raise around $13 billion to fund the Shaw acquisition in addition to its spectrum funding needs. All that additional debt could result in a one- or two-notch downgrade in Rogers’ credit ratings.
1 All amounts are in Canadian dollars, unless otherwise noted.
2 Source: https://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/h_sf11519.html
3 Source: https://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf11584.html
4 Over the 1-day period from July 29,2021 to July 30, 2021. Source: Bloomberg
5 Winning bidders have until August 13, 2021, to submit 20% of their total final payment. The remaining 80% is due on October 4, 2021.
6 Source: https://www.globenewswire.com/news-release/2021/03/31/2202515/0/en/TELUS-announces-closing-of-C-1-3-billion-equity-offering.html