DBRS Confirms Bell Canada/BCE Inc. Ratings, Trend Stable

DBRS has today confirmed the long- and short-term ratings of Bell Canada (Bell Canada or the Company) and its parent company BCE Inc. (BCE) at A (low)/R-1 (low) and BBB (high)/R-1 (low), respectively. DBRS has also confirmed the ratings of Bell Canada’s Subordinated Debentures at BBB. The trends are Stable. It should be noted that BCE’s ratings are based primarily on the ratings of Bell Canada. BCE’s ratings reflect the structural subordination of debt (currently none outstanding) and its preferred share obligations relative to Bell Canada. The rating confirmation reflects BCE/Bell Canada’s steady revenue growth and cash flow generation over the past year as a result of its fibre expansion and progress made within its wireless segment. The ratings continue to be supported by the Company’s large and established subscriber base and quad-play offerings, while also taking into account regulatory risks and the intensifying competition within the telecommunications sector.

BCE/Bell Canada’s earnings profile remained stable in 2012, primarily due to moderate but steady growth in both revenue and operating income as a result of continued wireless expansion, which more than offset declines within the Company’s legacy business lines. BCE/Bell Canada’s financial profile also remains stable and consistent with the current rating category, based on the Company’s stable cash generating capacity and relatively steady leverage levels. BCE’s gross debt-to-EBITDA ratio increased modestly to 2.03 times (x) at the end of 2012 compared with 1.94x a year prior, while Bell Canada’s leverage ratio increased to 1.97x from 1.86x over the same time period, due to a moderate increase in debt levels. Notably, Bell Canada issued over $1 billion of medium-term notes debentures in early 2012.

Going forward, DBRS expects BCE/Bell Canada’s earnings profile to remain within a range commensurate with its current rating category based on continued progress in wireless, its stabilizing wireline business, and, to a lesser extent, its growing media segment. DBRS forecasts that Bell Canada revenues will increase slightly in 2013, ranging between $17.8 billion and $18 billion. Gains should be driven by mid-single-digit top-line growth within Bell Canada’s wireless segment and growth in Internet Protocol television (IPTV) and broadband services within wireline. DBRS expects double-digit wireless EBITDA growth based on subscriber and average revenue per user (ARPU) gains, while cost of acquisition and retention costs should remain fairly steady. As a result, consolidated EBITDA is expected to range between $6.6 billion and $6.8 billion in 2013.

In terms of financial profile, DBRS expects BCE/Bell Canada to remain stable going forward based on its predictable cash flow generation. DBRS forecasts that BCE will generate $500 million to $700 million in free cash flow before changes in working capital in 2013. Bell Canada (BCE excluding Bell Aliant) is expected to generate between $600 million and $800 million next year. DBRS believes Bell Canada will direct a substantial portion of its free cash flow toward the 700 megahertz (MHz) spectrum auction expected to occur in Q4 2013. Bell Canada is also expected to complete its proposed $3.38 billion acquisition of Astral Media Inc. (less the $700 million to $800 million of expected radio and TV asset divestitures) in Q2 2013. The acquisition should result in gross-debt-to-EBITDA of between 2.20x and 2.30x. DBRS expects Bell Canada to reduce leverage to within a range consistent for the current ratings (gross debt-to-EBITDA of 1.50x to 2.00x) within 24 months of the proposed acquisition’s closing.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating the Communications Industry, Rating the Television Broadcasting Industry and Rating the Radio Broadcasting Industry, which can be found on our website under Methodologies.