DBRS Places Bell Aliant Credit Ratings Under Review with Negative Implications

DBRS has today placed the ratings of Bell Aliant Regional Communications, Limited Partnership (Bell Aliant or the Company) Under Review with Negative Implications. DBRS is reassessing the risks associated with the Company’s transformational strategy (including the magnitude and pace of capital requirements) while returns from this investment remain difficult to forecast and pressure on operating income/cash flow from traditional business lines persists.

Bell Aliant is currently in the process of transforming its business by supplanting its traditional voice with broadband and IPTV services. Although DBRS recognizes the merits of such a strategy, it acknowledges that the transition will not be without risk. The Company expects to have invested approximately $500 million in Fibre-to-the-Home (FTTH) by the end of 2012. As of June 30, 2012, Bell Aliant has achieved 582,000 homes passed and penetration of approximately 75,000 FibreOP Internet customers and 65,000 FibreOP TV subscribers. In the meantime, revenues from local and long distance continue to decline at a steady pace (down 5.0% and 10.8% year-over-year, respectively, for H1/2012). As a result, Bell Aliant’s total EBITDA declined by 1.1% to $655 million for the first half of 2012 compared to the same period in 2011, a moderation of a negative trend that began in 2010. The decline was softened due to incremental revenues and operating income from the Company’s FibreOp services.

Bell Aliant maintains significant capital investment requirements in the near-to-medium term in order to achieve its stated objective of reaching one million homes passed. DBRS believes there are strategic merits to accelerating the Company’s capex program in order to advance their position in an increasingly competitive environment. That said, an acceleration of investment would increase external funding requirements as DBRS expects the Company to generate negative free cash flow after dividends over the period of accelerated capital investment.

In its review, DBRS will focus on Bell Aliant’s prospects for penetration growth in the new business lines, size/pace of capital program and overall financing requirements in light of Management’s commitment to its dividend. DBRS will also reassess the competitive environment, including pricing strategies and the threat of product innovation. DBRS will aim to complete its assessment and resolve the Under Review status within the next month.

In terms of short-term debt, Bell Aliant’s Commercial Paper rating of R-1(low) reflected the Company’s superior liquidity strength as entities with a long-term rating of BBB (high) are typically coupled with a short-term rating of R-2 (high). As part of our assessment of the future capital program and financing requirements, DBRS will also review the appropriateness of having a Commercial Paper rating on Bell Aliant that exceeds the standard mapping.

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

The applicable methodology is Rating the Communications Industry (April 2011), which can be found on our website under Methodologies.