DBRS Comments on Bell Canada

In our most recent report, dated April 5, 2013, DBRS 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 also confirmed the ratings of Bell Canada’s Subordinated Debentures at BBB. The trends remain Stable. In the report, DBRS noted that the ratings continue to be supported by the Company’s large and established subscriber base and quadruple-play offerings, while also taking into account regulatory risks and the intensifying competition within the telecommunications sector.

DBRS also stated that it expects the Company to reduce its gross debt-to-EBITDA ratio to between 1.5 times (x) and 2.0x within 24 months of the closing of its Astral Media Inc. acquisition, which closed on July 5, 2013. DBRS now estimates Bell Canada’s gross debt-to-EBITDA to be between 2.1x and 2.2x upon completion of the $3.2 billion Astral Media Inc. acquisition (pro forma $700 million to $800 million of expected debt reduction, with proceeds from the divestiture of some radio and television assets).

Since DBRS’s latest report on Bell Canada, Industry Canada has restated its intention of establishing four wireless carriers in each region of the country. DBRS notes that a viable fourth competitor with strong financial backing could cause the competitive environment to intensify. DBRS believes the potential implications of increased competition for the Company’s operating performance and equity valuations could make less-conservative financial management more compelling for Bell Canada. In DBRS’s view, the addition of a strong fourth bidder in the 700 MHz wireless spectrum auction could materially increase the price for spectrum. These factors could make it more difficult for Bell Canada to reach its intended leverage target within DBRS’s stated 24-month timeframe. DBRS notes that failure by Bell Canada to deleverage as expected could result in a negative rating action.

Furthermore, DBRS feels that a strong fourth industry player could heighten competition such that even more conservative financial management may be required for BCE Inc./Bell Canada’s credit risk profile to remain commensurate with its current rating categories. DBRS will continue to carefully monitor the operating performance and financial management of Bell Canada, particularly in the context of an evolving competitive environment.

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

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