DBRS Confirms Bell Aliant’s Ratings at R-1 (low), BBB (high), Stable Trends

DBRS has today confirmed the short-term and long-term ratings of Bell Aliant Regional Communications, Limited Partnership (Bell Aliant LP or the Company) at R-1 (low) and BBB (high), respectively. The trends are Stable. The confirmation reflects a business risk profile that remains manageable and a stable financing risk profile. Although leverage remains higher than its Canadian peers, it remains appropriate for Bell Aliant LP’s ratings. Additionally, the Company benefits from scale derived from Bell Canada and a relationship that provides operating benefits.

Bell Aliant LP’s manageable business risk profile factors in its less competitive operating territory, its ability to grow average revenue per customer by increasing its high-speed Internet subscribers and by bundling multiple services. While the competitive intrusion by cable operators (expected to cover nearly two-thirds of Bell Aliant LP’s territory by the end of 2009) and technology substitution factors remain ongoing and continue to result in revenue pressure in its legacy fixed-line services, Bell Aliant LP has focused on growing data services, retaining its subscribers through bundles that include to up to four services to create further stickiness and streamlining its cost structure. DBRS notes that by adjusting its cost base as its revenue mix changes, Bell Aliant LP continues to be able to generate moderate EBITDA growth and hold its EBITDA margins in the mid-40% range which is healthy for any telco operator.

DBRS expects these factors to continue to drive moderate levels of EBITDA growth for Bell Aliant LP (EBITDA is expected to be around the $1.5 billion level of 2009), which is reasonable for a telco that does not own a wireless operation throughout its entire coverage territory. DBRS expects these trends to continue over the medium term until ultimately a competitive equilibrium is achieved with its cable competitors. However, DBRS notes the competitive intensity will remain ongoing and continue to require Bell Aliant to innovate and improve its services while expanding its data network further to cover its territory, especially in non-urban markets.

DBRS notes that as part of its bundling strategy and to remain competitive with cable operators in its territory, Bell Aliant LP has been deploying fibre closer to its customers (fibre-to-the-node or FTTN). This has given it the Company the ability to offer terrestrial video services in selected markets in addition to selling Bell Canada’s Bell TV satellite services as part of its bundle.

Recently, Bell Aliant LP has undertaken a fibre-to-the-home (FTTH) network deployment in two New Brunswick cities. DBRS believes that given the cost advantages provided by its largely aerial network in its Maritime markets, this is a prudent investment and should significantly elevate the Company’s ability to compete with cable operators in these markets. If successful, DBRS believes FTTH could be extended to other urban markets, with the use of FTTN and Bell TV in other markets.

From a financial perspective, DBRS notes that Bell Aliant LP continues to generate excess levels of free cash flow ($40.5 million for the nine months ended September 30, 2009) with cash flow from operations growth, stable levels of distributions and lower capex levels. Additionally, with cash flow-to-debt just below 0.40 times and gross debt-to-EBITDA around 2.0 times, these credit metrics continue to support Bell Aliant LP’s ratings. This free cash flow and further growth in cash flow from operations should give the Company greater ability to handle any future restructuring costs and pension contributions with a pension plan that had a sizable deficit at the end of 2008.

Over the medium term, DBRS expects to monitor Bell Aliant LP’s operating performance in an increasingly competitive environment to ensure this remains manageable, its ability to continue to adjust its cost base, the conversion to a corporation and any implications on its financial risk profile, as well as plans to refinance its 2011 maturities.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Telecom, which can be found on our website under Methodologies.

This is a Corporate Rating (Telecom/Media/Technology) rating.