DBRS Confirms Ratings of Télébec and NorthernTel at BBB (high), Stable Trends

DBRS has today confirmed the long-term ratings of Télébec, Limited Partnership (Télébec) and NorthernTel, Limited Partnership (NorthernTel; collectively, the Partnerships), both at BBB (high). The trends are Stable.

The Partnerships’ ratings remain supported by the dominant market position they enjoy in each of the regions they serve, predominantly rural geographic service areas largely isolated from direct competition. This has afforded the Partnerships some insulation from the general trends affecting North American telecommunications providers, as evidenced by below-average access line (NAS) erosion (averaging roughly 2% per year versus roughly low to mid-single digits per year for telcos operating in competitive markets), and above-average EBITDA margins of over 50%, which have improved as the Partnerships’ growth and cost efficiencies have outpaced pressure on wireline voice services. Additionally, DBRS notes that the Partnerships benefit from their relationship with Bell Aliant Regional Communications, Limited Partnership (Bell Aliant) and Bell Canada in terms of scale benefits and an operating relationship.

DBRS expects similar trends to continue to be the largest drivers of EBITDA, with mild but steady rates of NAS erosion, pressure on long-distance services offset by growth in high-speed Internet and wireless and further cost efficiencies. These trends are expected to result in modest revenue and EBITDA growth for the remainder of 2009 and for 2010.

The Partnerships’ financial profile is expected to remain stable and strong for the remainder of 2009 and in 2010 with healthy levels of free cash flow, with moderate cash flow from operations growth and capex remaining around the $50 million level.

This should give the Partnerships the ability to boost distributions to their ultimate parent, Bell Aliant, or to further reduce their debt as it matures.

It remains to be seen whether the Partnerships issue debt in the future or if Bell Aliant becomes the exclusive debt-issuing entity going forward. DBRS notes that Télébec and NorthernTel routinely borrow from and lend to Bell Aliant on a short-term, revolving basis and that Bell Aliant’s recent debt issuance ($350 million issued in May 2009) allowed Bell Aliant to repay some short-term borrowings from Télébec which in turn helped Télébec repay its credit facilities that had refinanced a note that originally matured in 2008.

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

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

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