DBRS Limited (DBRS Morningstar) confirmed BCE Inc.’s (BCE or the Company) Issuer Rating, Short-Term Issuer Rating, and Unsecured Debentures rating as well as the ratings of Bell Canada and Bell-MTS Inc. (the wholly owned subsidiary). All trends remain Stable, which reflects an economic reopening to a new normal and acknowledge the Company’s multiyear accelerated capex program and network investments that are expected to support long-term earnings growth well after concluding the current 5G/Fibre network investment cycle. The rating confirmations reflect the solid operating performance in 2021 that was in line with DBRS Morningstar’s forecast. 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 other revenue diversification. The ratings also reflect intensifying competition, the expected loss of legacy wireline services revenues, higher near- to medium-term network investment spending, and the risks associated with technological and regulatory change.
BCE Inc./Bell Canada’s earnings profile remained stable year over year (YOY) and in line with DBRS Morningstar’s expectation of an improving operating environment reflecting a material reduction in restrictions and a broad return to a more “normal” lifestyle. As expected, 2021 consolidated revenue increased YOY to $23.5 billion, a 2.5% increase, and EBITDA of $9.9 billion was up 3.0% YOY and in line with DBRS Morningstar’s estimate for the year of between $9.7 billion and $10.0 billion.
Performance in 2021 was driven by Wireless growth of 3.6% to $9.0 billion, reflecting service revenue up 3.7% driven by continued healthy net postpaid subscriber additions, the migration to higher value data plans and higher-value smartphone loading, and despite roaming revenue still below pre-pandemic levels. Wireless product revenue was up 3.4% in 2021 despite handset supply constraints in H2 2021. Wireline revenue in 2021 was essentially flat YOY at $12.2 billion as consumer and enterprise data services (residential Internet, enterprise cloud, and security) growth was offset by continued declines in legacy voice and satellite and an annual decrease in equipment revenue as a result of supply-chain issues and delayed enterprise spending. Finally, Media was up 10.4% YOY to $3.0 billion 2021, driven primarily by an increase in advertising spending and higher subscriber revenue.
Consolidated 2021 EBITDA margin was 42.2%, up 20 basis points YOY as the Company saw solid flow through of mobile service revenue, acceleration of online sales, benefits from cost savings initiatives, and lower Internet protocol television (IPTV) customer churn as Bell Canada continues to leverage its multibrand strategy. However, EBITDA margin performance was negatively affected by an acceleration of programming costs and broadcast rights in the Media division as live sports resumed and TV productions increased compared with 2020.
BCE/Bell Canada’s financial profile continues to be supportive of the current rating. Based on DBRS Morningstar-adjusted figures, cash flow from operations was $7.6 billion compared with $7.2 billion (+4.9% YOY), primarily reflecting a 20.1% YOY increase in DBRS Morningstar net income before nonrecurring items. Although cash flow from operations increased materially, so too did capex. Capex in 2021 was $4.8 billion, up 15.1% YOY from $4.2 billion, and represented a capital intensity of 20.6%, reflecting the company’s two-year accelerated fibre and 5G investment plan. Dividend payments increased 5.1% YOY, resulting in free cash flow before changes in working capital was a deficit of $544 million in 2021. Reflecting a higher year-end (YE) gross debt balance of $30.6 billion compared with $27.3 billion at YE2020, gross debt-to-EBITDA was 3.10 times (x) in 2021 compared with 2.84x in 2020, despite the increase in EBITDA.
Looking ahead to 2022, DBRS Morningstar expects BCE/Bell Canada’s earnings to benefit from not only an increase in mobile roaming as travel restrictions ease, but also reflect the Company’s ability to leverage the rapid acceleration of its network capabilities including a 5G network that covers ~70% of the Canadian population and an incremental 1.1 million new direct fibre and wireless home Internet (WHI) added in 2021. DBRS Morningstar forecasts Wireless Service to grow in the low- to mid-single digits as the Company maintains its focus on driving higher-value 5G consumer plans and grows its Internet-of-Things (IoT) and multi-access Edge Computing (MEC) enterprise solutions. Wireless Equipment revenue is forecast to increase in the mid-single digits, reflecting a modest improvement in supply-chain issues that curtailed 2021 activity and a less restrictive retail store environment.
The Wireline segment should benefit from the continued investment in the FTTH network buildout (estimated at an additional ~900k new FTTP location in 2022) and should deliver fibre coverage of ~8.2 million residential and business locations by YE2022. This positions the Wireline division to continue to increase Fibe Internet and TV market share, offer faster data, and create new bundling opportunities with a competitive wireless offering. As a result, Wireline revenue is forecast to increase in the low-single digits YOY in 2022.
DBRS Morningstar expects a continuation of the 2021 recovery in the Media segment to continue in 2022. Positive Media segment revenue growth is forecast to be driven primarily by a return in advertising revenue to pre-Coronavirus Disease (COVID-19) levels (including digital ad spend) and through growth in the subscriber revenues of Crave, Bell Media’s video on demand service. Overall, DBRS Morningstar forecasts BCE/Bell Canada’s revenue to increase in the mid-single digits to between $24.0 billion and $24.5 billion and further increase to about $24.8 billion in 2023.
DBRS Morningstar forecasts the 2022 consolidated EBITDA margin to be roughly flat YOY, as inflationary pressures, higher programming expenses, and high-margin legacy service revenue erosion are essentially offset by disciplined wireless plan discounting, continued improvement in wireless roaming revenue, strong wireline residential performance, and lower network costs. As a result, DBRS Morningstar forecasts 2022 consolidated EBITDA to increase to between $10.1 billion and $10.3 billion, with growth in each operating segment and for consolidated EBITDA to continue to grow to approximately $10.6 billion in 2023.
DBRS Morningstar expects BCE/Bell Canada’s financial profile to absorb near-term cash flow pressures primarily related to an accelerated pace of network investment (FTTN/WTTH, 5G, Smart Core) and the acquisition of c-band and mmWave spectrum licences, partially offset by steady EBITDA growth and lower pension cash funding through DBRS Morningstar’s forecast horizon. DBRS Morningstar forecasts 2022 capital intensity (capex divided by revenue) to remain in the low-20s, or roughly flat YOY with the 20.6% posted in 2021 and includes spending on the accelerated broadband network program. Looking ahead to 2023, capex is forecast to decline materially YOY; however, DBRS Morningstar anticipates the 3800MHz spectrum auction to occur in 2023, followed by the mmWave spectrum auction in 2024 that will continue to consume capital. Overall, DBRS Morningstar forecasts that the Company will be free cash flow negative through 2024, before returning to positive territory in 2025.
As of YE2021, the Company had approximately $3.4 billion of liquidity available, including $207 million in cash. With the February 2022 issuance of USD750 million Series US-7 notes and the subsequent redemption of the Bell Canada’s C$1.0 billion Series M-26 notes due March 2023, the Company does not have any material debt due until September 2023 ($600 million 4.70% Series M-29 debentures). Given the significant network investment demands (i.e. continued FTTP coverage and 5G network expansion) and spectrum auctions in 2023 and 2024, gross leverage is forecast to remain between 3.0x and 3.25x through 2025 before declining toward the Company’s long-term leverage target range between 2.0x and 2.5x. While the Company’s leverage above 3.0x is higher than originally contemplated, DBRS Morningstar estimates that over 80% of near-term capex and investment spending (i.e. access to spectrum) is focused on network growth and/or performance initiatives, an improved customer experience and enhanced digital capabilities that are expected to drive long-term earnings growth.
DBRS Morningstar believes that BCE/Bell Canada has the scale, financial resources, and market position to manage the current 5G/Fibre capex spending program within its current rating category over the near to medium term. Although unlikely, if BCE/Bell Canada were to achieve a substantial increase in its Wireless and Wireline market share that resulted in a commensurate structural improvement in the Company’s earnings profile, including a supportive regulatory environment, and were to manage leverage sustainably at the low end of the Company’s target range, a positive rating action could occur. Conversely, if, despite the utility-like nature of the industry, BCE/Bell Canada experienced a deterioration in its credit metrics as a result of weaker-than-expected operating performance, lower cash flow, and/or more aggressive than expected financial management, for an extended period, a negative rating action could occur.
DBRS Morningstar applied the Communications Methodology based on a proportion of revenue derived from the Company’s Wireless and Wireline business segments. DBRS Morningstar applied the Broadcasting Methodology based on a proportion of revenue derived from the Company’s Media operations. DBRS Morningstar applied the four criteria as applicable.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Communications Industry (July 27, 2021, https://www.dbrsmorningstar.com/research/382119), Rating Companies in the Broadcasting Industry (March 12, 2021, https://www.dbrsmorningstar.com/research/375262), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021, https://www.dbrsmorningstar.com/research/386615), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022, https://www.dbrsmorningstar.com/research/393065), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021, https://www.dbrsmorningstar.com/research/379424) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021, https://www.dbrsmorningstar.com/research/386355), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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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