DBRS Comments on the BCE and Bell Canada Announcement Featuring a Dividend Increase and the Use of Excess Cash

DBRS notes that the announcement made by BCE Inc. (BCE or the Company) and Bell Canada today, which includes a 7% dividend increase, normal course issuer bid of up to $500 million in 2010 and $500 million voluntary pension contribution, does not affect their ratings of BBB (high) and R-1 (low) for BCE and the A (low) and R-1 (low) for Bell Canada. However, with a strong balance sheet, DBRS believes that changes in Bell Canada’s business risk profile will be the largest driver in determining these ratings going forward.

DBRS notes that although today’s announcement, which outlines BCE’s and Bell Canada’s plans to continue to grow their dividends and repurchase shares, has a shareholder focus, the Company has significantly de-leveraged the balance sheets of both BCE and Bell Canada in 2009 and has the ability to return capital to shareholders, given the performance of Bell Canada’s operations in 2009 and its outlook for 2010. Currently, BCE’s debt-to-EBITDA is below 1.7 times and cash flow-to-debt is in the upper 0.40 times to 0.50 times range, which is strong for a telco. Furthermore, Bell Canada’s voluntary pension contribution of $500 million will reduce its pension deficit in 2009 and its pension funding requirements and pension expense for 2010. Combined with a higher interest rate environment in the future, this should help Bell Canada make considerable progress in reducing or possibly eliminating its pension deficit (BCE reported at $3.4 billion deficit at the end of 2008, of which Bell Canada’s deficit was a significant portion).

Taking these measures into consideration, DBRS believes that BCE and Bell Canada have been balanced in their capital structure policies over the past year to the benefit of all stakeholders. DBRS expects this balance to continue going forward.

DBRS notes that the prudent focus on setting a conservative financial risk profile, the steady operating performance of Bell Canada despite the competitive environment and some cyclical impacts from the economy in 2009 give BCE the platform to enhance its returns to its shareholders. Also, with a common share dividend payout set at a target of 65% to 75% of adjusted earnings per share, dividends are aligned with the performance of its operations – mainly that of Bell Canada.

With DBRS anticipating that competition will remain intense for Bell Canada going forward, the Company’s network investment, including its fibre deployment initiatives, and ongoing commitment to improving its customer service levels become more imperative in order for it to maintain its business risk profile. DBRS expects wireline to remain competitive as cable operators increase their network capabilities and wireless to possibly intensify further as new wireless players enter the Canadian market.

DBRS maintains that Bell Canada’s financial risk profile remains a competitive advantage in an environment where the business risk profiles of the telco and cable sectors continue to look more and more similar. While the balance sheets of the telcos could be the one differentiating factor between these two sectors over the medium term, it will be the business risk profiles that are likely to drive rating changes going forward.

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.