DBRS Downgrades Bell Aliant to R-2 (middle), BBB and Pfd-3, all with Stable Trends

DBRS has today downgraded Bell Aliant Regional Communications, Limited Partnership’s (Bell Aliant’s or the Company’s) Commercial Paper rating to R-2 (middle) from R-1 (low), Senior Unsecured Debt to BBB from BBB (high) and Preferred Shares to Pfd-3 from Pfd-3 (high), all with Stable trends. This action removes the ratings from Under Review with Negative Implications. This downgrade follows DBRS’s reassessment of the risks associated with the Company’s transformational strategy while the Stable trends reflect DBRS’s view that the Company’s fibre strategy presents a viable initiative with strong potential.

Bell Aliant is currently in the process of transforming its business by supplanting its traditional voice with broadband and IPTV services. The Company expects to have invested approximately $500 million in its Fibre-to-the-Home (FTTH) network expansion by the end of 2012. As of June 30, 2012, Bell Aliant has achieved 582,000 homes passed, with 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 and, as a result, continue to pressure operating income. This negative trend, which began in 2010, has been partially offset by incremental revenues and operating income from the Company’s FibreOP services.

On August 2, 2012, DBRS noted that it recognizes the merits of Bell Aliant’s fibre expansion; however, it acknowledges that the transition will also not be without risk. In its review, DBRS focused on (1) Bell Aliant’s growth prospects within its new business lines; (2) the size and pace of the Company’s capital program and overall financing requirements, in light of management’s commitment to its dividend; and (3) the competitive environment, including pricing strategies and the threat of product innovation.

Although Bell Aliant continues to grow its fibre footprint and increase its IP subscriber base, the long-term effects of the rollout on consolidated revenue and EBITDA growth remain difficult to gauge. The Company’s FibreOP services are just beginning to generate positive EBITDA, while declining traditional local and long distance revenue still account for the majority of Bell Aliant’s current operating profits.

To date, Management has not specified the magnitude or pace of Bell Aliant’s fibre expansion program. However, Management has stated that it intends to reach its goal of one million homes passed over the next few years. Higher capex levels, the influx of cash taxes in the near future and steady dividend payouts should place a strain on free cash flow in the near future. As such, Bell Aliant will likely require additional financing to continue the capital deployment of its fibre network.

Lastly, there is a fair degree of uncertainty regarding the long-term strategies of Bell Aliant’s rivals. DBRS notes that the future product offerings and pricing strategies of competitors may affect the profitability of Bell Aliant’s fibre expansion over time.

With regards to short-term debt, DBRS has downgraded Bell Aliant’s Commercial Paper rating to R-2 (middle) from R-1 (low), as DBRS believes that Bell Aliant’s commercial paper rating should not exceed the standard mapping, and thus should reflect a rating typically coupled with a long-term rating of BBB.

In terms of outlook, DBRS has placed Bell Aliant’s trends at Stable, with the view that supplanting traditional voice services is necessary for the long-term viability of the Company, and that FibreOP presents a viable initiative with strong potential based on its current network advantage. With respect to the financial profile, DBRS expects Bell Aliant to maintain credit metrics that are consistent with the BBB range. This view is based on DBRS’s belief that Bell Aliant should achieve adequate growth in operating income from rising fibre optic penetration over the medium term and that any increase in debt over this period would likely be moderate.

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

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