DBRS Comments on Bell Aliant’s Corporate Conversion Plans, Ratings Unaffected

DBRS notes that Bell Aliant Regional Communications, Limited Partnership (Bell Aliant or the Company) recently announced details that provide additional clarity on its conversion from an income trust to a corporation. At the same time, the Company announced plans to accelerate its fibre deployment.

In terms of its conversion to a corporation, Bell Aliant announced that it will: (a) maintain its $2.90 per unit annual distribution to the end of 2010; (b) begin to pay an initial annual dividend of $1.90 per share in 2011, payable quarterly – a payout ratio of 75% to 85% of free cash flow; and (c) convert to a corporation effective January 1, 2011. While this announcement does not affect Bell Aliant Regional Communications Income Fund’s STA-2 (high) Stability Rating, DBRS plans to discontinue this rating upon Bell Aliant’s conversion to a corporation.

Furthermore, DBRS notes that Bell Aliant’s conversion, as described, along with its accelerated fibre investment, do not have any impact on the Company’s current R-1 (low) and BBB (high) credit ratings. DBRS notes that Bell Aliant has sufficient tax losses that will allow for the deferral of cash taxes for the first two years following its conversion. The Company plans to use this deferral to help fund the accelerated fibre-to-the-home (FTTH) deployment ($350 million over the 2011 and 2012 time frame) and for debt reduction. At the end of 2012, Bell Aliant plans to cover 600,000 households and businesses (one-third of its territory) with FTTH, which should put it in a better position to compete with the cable companies.

DBRS notes that Bell Aliant’s credit ratings remain supported by: (1) a manageable business risk profile, with data and wireless growth and cost efficiencies which offset competitive pressure on its incumbent business; and (b) a stable financial risk profile that, with yesterday’s announcement, could improve over the next couple of years. DBRS notes that currently Bell Aliant has reasonable leverage – 2.24 times net debt-to-EBITDA and cash flow-to-debt of 0.39 times. DBRS notes that a stronger financial risk profile should better position the Company to address its upcoming debt maturities, including nearly $750 million of debt maturing in 2011.

Despite Bell Aliant’s forthcoming taxability as a corporation and the higher capex program associated with its fibre investment, DBRS expects the Company to generate sufficient cash flow from operations to cover its capex and dividends 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.