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

DBRS Limited (DBRS) confirmed all of the ratings of Bell Canada (Bell Canada or the Company), Bell-MTS Inc. (MTS, the wholly owned subsidiary) and its parent company BCE Inc. (BCE) as noted in the table below. All trends remain Stable. The ratings are supported by the Company’s considerable size and scale, as well as its leading market position in wireline services, wireless advances and revenue diversification. The ratings also reflect intensifying competition, the expected loss of legacy wireline services revenues and the risks associated with technological and regulatory change.

BCE/Bell Canada’s earnings profile remained sound for the current rating, supported by organic growth and market share gains in wireless as well as sustained increases in its Internet Protocol television (IPTV) and Internet subscriber bases and the MTS acquisition, which helped to mitigate declines in legacy services. Revenues for 2017 increased 4.6% year over year (YOY) to $22.7 billion, driven by very strong performance in wireless as well as low single-digit growth in wireline. 2017 EBITDA margin was essentially flat at 40.4% in 2017 (versus 40.5% in 2016), primarily reflecting a higher revenue base, cost savings initiatives, improved retention rates and MTS integration synergies, offset by rising media costs, increasing wireline acquisition and retention costs and the adverse impact of decisions by the Canadian Radio-television and Telecommunications Commission. As such, EBITDA increased 4.4% in 2017 to $9.2 billion.

Despite the incremental debt associated with the MTS acquisition, BCE/Bell Canada’s financial profile remained acceptable for the current rating. DBRS-calculated free cash flow (after dividends, but before changes in working capital) remained negligible as a percent of total debt, but improved considerably YOY. Total balance-sheet debt climbed to $23.4 billion in 2017, up from $21.5 billion in 2016, resulting in gross debt-to-EBITDA of 2.66 times (x), compared to 2.56x in 2016; however, 2017 EBITDA coverage ticked up modestly and cash flow from operations-to-gross debt was essentially unchanged YOY.

DBRS expects BCE/Bell Canada’s earnings profile to remain stable over the near-to-medium term, driven by wireless growth and wireline fibre network build-out to support positive Internet and IPTV subscriber and avenue revenue per user trends. DBRS forecasts 2018 Bell Canada revenue of $23.0 billion to $23.5 billion, driven by positive revenue growth in all three operating segments. DBRS expects EBITDA margins should be essentially flat YOY, as continued erosion in telephony and satellite TV services and a more competitive wireless marketplace is expected to be offset by lower fibre deployment costs, ongoing cost initiatives and acquisition synergies. As such, EBITDA is expected to increase to between $9.3 billion and $9.4 billion in 2018.

DBRS expects BCE/Bell Canada’s financial profile to remain stable and supportive of the current rating over the near to medium term. The financial profile should continue to reflect steady growth in operating cash flow and prudent capital management, such that the Company is able to maintain gross debt-to-EBITDA below 3.0x, a level which DBRS believes is sufficient for the current rating.

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

The principal 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 dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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