DBRS Confirms Bell Canada at BBB (high) and BCE at BBB with Stable Trends

DBRS Limited (DBRS) has today confirmed all of the ratings of Bell Canada (Bell Canada or the Company) and its parent company BCE Inc. (BCE) as noted above. All trends remain Stable. The ratings acknowledge the expected increase in financial leverage associated with recent acquisition activity, including the privatization of Q9 Networks Inc. (Q9) and the proposed acquisition of Manitoba Telecom Services Inc. (MTS), which is awaiting regulatory approvals. The ratings continue to be supported by the Company’s considerable size and scale, leading market position in wireline services, wireless advances and revenue diversification. The ratings also reflect intensifying competition, expected loss of legacy wireline services revenues, risks associated with technological and regulatory change as well as the industry’s capital-intensive nature.

On August 8, 2016, DBRS downgraded Bell Canada and BCE’s ratings following the announcement that BCE would privatize Q9 in a transaction valued at $675 million (including net debt) and the May 2016 announcement of an agreement to purchase MTS for $3.9 billion (the MTS Transaction), which would delay deleveraging plans. Since then, the Q9 transaction has closed and the regulatory approval process for the MTS acquisition is progressing. DBRS’s current ratings reflect the view that the MTS Transaction will likely be completed as previously contemplated.

The Company’s consolidated revenues rose to $21.6 billion in the last 12 months (LTM) ended Q3 2016 compared with $21.5 billion in 2015, supported by continued growth in the wireless and media segments. Despite Internet protocol television (IPTV) and broadband Internet subscriber gains, overall wireline revenues were affected by the sustained erosion of legacy services. EBITDA margins climbed to 41.6% in the nine months ended September 30, 2016 (9M 2016), driven primarily by cost control measures. As such, EBITDA rose to $8.74 billion in the LTM ended Q3 2016 from $8.55 billion in 2015. DBRS-calculated free cash flow (after dividends and before changes in working capital) was $68 million in LTM ended Q3 2016 versus $47 million in 2015, as capital spending and cash dividend outlays remained elevated. Debt-financed acquisitions drove total debt to $21.5 billion as at September 30, 2016. As such, in the LTM ended Q3 2016, debt-to-EBITDA, cash flow-to-debt and EBITDA interest coverage were 2.46 times (x), 29.1% and 9.31x, respectively, compared with 2.37x, 29.7% and 8.92x at the end of 2015. On a net debt basis, financial leverage remained fairly unchanged year over year.

DBRS views Bell Canada as a best-in-class telecommunications operator, exemplified by a track record of organic and acquisitive growth and cost control that has contributed to consistent growth in operating income. However, DBRS expects the operating environment to remain challenging, marked by intensifying competition in the wireless market and increased risks in the media business, including structural (cord shaving/cord cutting and over-the-top (OTT) video streaming) and regulatory changes (pick and pay) affecting television broadcasting, coupled with weakness in advertising. As such, organic revenue growth is expected to remain soft – in the low end of the 1% to 3% range through 2017. However, the top line will be further bolstered by the recently closed Q9 acquisition and the proposed MTS acquisition, which is now expected to close in early 2017. DBRS expects pro forma EBITDA margins to rise steadily to the mid-41% range, supported by rising data usage, cost savings measures and operational synergies from recent acquisitions. As such, pro forma EBITDA should climb well above $9.0 billion over the near to medium term. DBRS considers Bell Canada well placed in the BBB (high) rating category; and in terms of financial profile, DBRS believes that gross debt-to-EBITDA of up to 2.75x would be adequate to maintain the current ratings while continuing to consider evolving free cash flow (after dividends) levels and business risks.

DBRS estimates that the Company’s pro forma free cash flow (after dividends)-to-total debt will remain below 5% over the near to medium term because of high capital intensity and dividend payouts, which could limit management’s ability to deleverage.

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 Security Criteria for Corporate Issuers and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.