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 remain Stable. It should be noted that BCE’s ratings are based primarily on the ratings of Bell Canada and reflect the structural subordination of debt (currently none outstanding) and its preferred share obligations relative to Bell Canada. The rating confirmation reflects DBRS’s expectation that Bell Canada will reduce its gross debt-to-EBITDA ratio to below 2.0 times (x) by mid-2015. The ratings continue to be supported by the Company’s large and established subscriber base and quad-play offerings, while also taking into account intensifying competition within the telecommunications sector and the risks associated with regulatory change.

BCE/Bell Canada’s earnings profile remained stable in 2013 due to moderate but steady gains in both revenue and operating income. Increased revenues from wireless average revenue per user (ARPU) and subscriber growth, the continued fibre expansion and the acquisition of Astral combined to exceed declines within the Company’s legacy business lines. The benefits of operating leverage, lower handset subsidies and cost-cutting led to a 26 bps increase in Bell Canada’s EBITDA margins year over year, to 37.6%. As such, Bell Canada’s EBITDA rose to just over $6.8 billion in 2013, up 3.4% year over year.

With regards to BCE’s financial profile, cash flow from operations increased substantially in 2013 to $6.3 billion from $5.2 billion in 2012, as no voluntary pension contributions were made in this year (compared to $750 million for Bell Canada and $100 million for Bell Aliant in 2012). Capex and dividends both increased modestly year over year, resulting in free cash flow before changes in working capital of approximately $560 million. BCE used its free cash flow and $2.2 billion of additional debt to fund the Astral acquisition. As such, BCE’s gross debt-to-EBITDA ratio increased to 2.34x at the end of 2013, compared with 2.03x in 2012. Bell Canada’s leverage ratio increased to 2.29x from 1.91x over the same time period.

Going forward, DBRS expects Bell Canada to deliver steady earnings growth based on continued gains in wireless, a stabilizing wireline business, and improved operating efficiencies. DBRS forecasts that revenues will increase by 2% to 3% in 2014, ranging between $18.5 billion and $18.7 billion, driven by mid-single-digit gains in wireless. DBRS expects flat wireline revenues in 2014 as IP-based revenues mitigate landline losses, reversing the trend of declines since 2009. DBRS expects consolidated EBITDA margins to improve modestly in 2014, rising to approximately 38% as the Company continues to implement cost savings initiatives. As a result, consolidated EBITDA is expected to range between $6.9 billion and $7.1 billion in 2014.

In early 2014, BCE/Bell Canada acquired $566 million worth of spectrum licenses in the 700 MHz spectrum auction. The price paid was at the lower end of DBRS’s expectations. The licenses are expected to be financed with a combination of free cash flow and asset divestitures associated with the Astral acquisition. DBRS notes that the return on investment is difficult to assess, as the benefits will depend on deployment decisions and be achieved over many years.
In terms of financial profile, DBRS expects Bell Canada’s leverage to be appropriate for the current rating category by mid-2015, following modest debt reduction and low-single-digit growth in EBITDA. DBRS expects Bell Canada to use the majority of its free cash flow and ~$700 million of proceeds from the Astral divestitures toward spectrum auction purchases and debt reduction. As such, DBRS forecasts Bell Canada’s gross debt-to-EBITDA will stand at approximately 2.1x at the end of 2014. DBRS continues to expect the Company to reduce its gross debt-to-EBITDA ratio to below 2.0x by mid-2015. DBRS notes that failure by Bell Canada to deleverage as expected could result in a negative rating action.

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