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

DBRS Limited (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. All trends remain Stable. It should be noted that BCE’s ratings are linked to 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 ratings acknowledge the increase in financial leverage resulting from the acquisition of Astral Media and privatization of Bell Aliant (which DBRS believes enhanced the Company’s scale and diversification), but also reflect the expectation for deleveraging over the medium term. The ratings continue to be supported by the Company’s large and established subscriber base and quad-play offerings, and also consider intensifying competition and the risks associated with regulatory change.

BCE/Bell Canada’s earnings profile remains sound, supported by solid organic growth and market share gains in both wireless and wireline segments. Consolidated revenues grew by 2.4% to $10.6 billion in H1 2015, driven primarily by strong post-paid net activations and average revenue per user (ARPU) gains in the wireless segment and break-even wireline revenues. EBITDA margins rose modestly owing to continued execution of the fibre strategy and operating synergies from the privatization of Bell Aliant. As such, consolidated adjusted EBITDA rose by 3.0% to $4.3 billion in H1 2015. While BCE/Bell Canada’s earnings profile has shown resilience, financial leverage has increased over the past couple of years to a level that is putting considerable pressure on the current ratings. At June 30, 2015, gross debt-to-last 12 months’ EBITDA rose to 2.43 times (x), from 2.34x in 2013.

Going forward, DBRS expects the Company to deliver steady earnings growth based on continued strength in the wireless segment, stabilization in the wireline segment as IPTV and broadband advances continue to mitigate legacy revenue losses and cost-savings initiatives combined with operating synergies stemming from the Bell Aliant integration. DBRS expects consolidated revenues to grow in the 2% to 3% range to $21.5 billion to $21.7 billion, while EBITDA margins are expected to be remain fairly stable in the 39% to 40% range. As such, DBRS expects consolidated EBITDA to range between $8.5 billion and $8.6 billion in 2015. The Company’s financial profile is expected to improve over the medium term, given its cash-generating capacity and management’s stated intention to de-lever to a net debt-to-EBITDA target of 1.75x to 2.25x. In 2015, DBRS expects normalized cash flow from operations to grow slightly faster than operating income to $6.0 billion to $6.2 billion. DBRS forecasts that BCE will generate $400 million to $600 million of free cash flow before working capital in 2015, and use excess free cash flow to purchase spectrum assets and reduce debt.

Although the increase in leverage resulting from the recent acquisitions was meaningful, DBRS was willing to tolerate this increase within the current rating category given the benefits to the business risk profile as well as the Company’s solid coverage ratios and operating performance. Additionally, DBRS believes that the Company retains the willingness and ability to gradually de-lever toward its net debt leverage target by mid-2017, through a combination of steady EBITDA growth and debt reduction. However, should the Company be challenged in its efforts to improve credit metrics due to weaker-than-expected operating performance and/or more aggressive-than-expected financial management (debt-financed investments and/or share repurchases) this would likely lead to 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, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers and Rating Holding Companies and Their Subsidiaries which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.