Telus Corporation : Capital Structure Management

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Telus Corporation: Capital Structure Management (Case Study)
Introduction

Telus appeared in the late 1990’s by the merger of Alberta-based Telus and BC Telecom in an environment of significant changes for the incumbent carriers who had previously enjoyed a monopolized service offering. Soon after its creation Telus found itself in the early 2000 to be facing major hurdles of maintaining its financing plans. The early 2000 offered an environment of increased competition for telecom companies, saw the crash of the dot-com bubble and offered a weaker business climate as a result of the 9/11 tragedy. Within this environment, the ratings by credit rating companies had a profound influence on how telecom companies would continue to do business.
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In February 2002, Call-Net Enterprises Limited, reported a $1.4 billion loss for 2001. In April 2002, Bell Canada Enterprises stopped providing long term funding to Teleglobe, one of its major subsidiaries. This decision caused Teleglobe to fall into bankruptcy.
Key Issues / Main Problems
Due to the changed business environment, a number of key issues came to the forefront. With the downgrading of Telus’s credit rating by credit rating companies to speculative grade from investment grade new implications came. How could major investor support be maintained as they rely on these ratings in investment decisions? Would Telus’s securitization program fall into jeopardy if the company’s debt was downgraded to below investment grade by the Dominion Bond Rating Service (DBRS)? How would Telus’s financing plan be maintained in the light of this downgrade? How could the reduction in revenue be addressed due to the increased competitive environment?

Why these issues occurred

Telus’s credit rating was downgraded by all three companies covering Telus. Moody downgraded Telus’s credit rating from Baa2 to Ba1 on July 25, 2002 as it requires Telus to maintain the ratio of debt to earning before interest, taxes, depreciation and amortization to not exceed 3.8 times. DBRS downgraded Telus’s credit rating from BBB(high) to BBB on July 8, 2002 as it

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