DBRS Assigns Short Term Issuer Rating to BCE Inc., Confirms Ratings of Bell Canada, Trends Stable

DBRS Limited (DBRS) assigned a Short Term Issuer Rating of R-2 (middle) with a Stable trend to BCE Inc. (BCE), the parent company of Bell Canada (the Company). This rating effectively represents a placeholder for BCE as if it was an issuer of commercial paper. As a result, DBRS also discontinued and withdrew the rating of BCE’s Commercial Paper (previously R-2 (middle), Stable). DBRS also confirmed BCE’s Issuer Rating and Unsecured Debentures rating, as well as all the ratings of Bell Canada and Bell-MTS Inc. All trends remain Stable. The rating confirmations are supported by steady operating income growth and stable financial metrics. The ratings are supported by the Company’s considerable size and scale, as well as its leading market position in wireline services, number two market position in wireless with strong 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 is well positioned in the current ratings, supported by steady operating growth, wireless market share gains and an impressive track record of operating income growth despite headwinds in its legacy wireline services offering. Revenues for 2018 increased 3.1% year over year (YOY) to $23.5 billion, driven by growth across all three operating segments. Adjusted EBITDA margin declined to 40.6% in 2018 from 40.8% YOY, primarily reflecting a higher product growth rate than in services, higher media content costs and margin pressure from traditional wireline services. Despite the modest margin compression, adjusted EBITDA increased 2.7% YOY in 2018 to $9.5 billion.

BCE/Bell Canada’s financial profile remains stable as the company continues to finance its capital program and dividends through internally generated cash flow, while any increase in gross debt is generally offset by growth in operating income. Total debt was $24.4 billion in 2018, up from $23.4 billion in 2017; however, as a result of the Company’s strong operating results, financial leverage was essentially flat. The gross debt-to-EBITDA for 2018 was 2.77 times (x), compared with 2.74x in 2017, on a comparable basis.

DBRS expects the Company’s earnings profile to remain stable over the near to medium term, driven primarily by continued growth in the Wireless and Wireline segments. In 2019, DBRS expects revenue of $23.5 billion to $24.0 billion and the adjusted EBITDA margin to range between 42.0% and 42.5% (IRFS 16 adjusted basis), up an average 40 bps YOY. DBRS expects the positive margin leverage to primarily reflect higher revenue, cost saving measures and operational efficiencies. As a result, reported adjusted EBITDA is expected to be $10.0 billion to $10.2 billion.

DBRS expects the Company’s financial profile to remain stable over the near to medium term. The financial profile should continue to be supported by 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.

Should operating performance deteriorate and/or financial management become more aggressive such that gross debt-to-EBITDA increases materially above 3.0x for a sustained period, a negative rating action may result. Conversely, DBRS believes a positive rating action is highly unlikely over the foreseeable future due to the competitive landscape, high level of capital intensity of the industry and material distributions to shareholders.

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

The principal methodologies are Rating Companies in the Communications Industry and Rating Companies in the Broadcasting Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Guarantees and Other Forms of Support, 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 dbrs.com under Methodologies & Criteria.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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