Morningstar DBRS Confirms Issuer Ratings on BCE Inc./Bell Canada at BBB and BBB (high), Respectively, With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed BCE Inc.’s (BCE or the Company) Issuer Rating of BBB and Bell Canada’s Issuer Rating of BBB (high). Morningstar DBRS also confirmed BCE’s Short-Term Issuer Rating, Unsecured Debentures credit rating, and All Classes Preferred Shares credit rating as well as the credit ratings of Bell Canada and Bell-MTS Inc. (the wholly owned subsidiary). All trends remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect stable 2023 operating performance driven by solid growth in Bell Communication and Technology Services, primarily reflecting strong wireless service and product revenue growth and impressive wireline product revenue growth, which translated to flat year-over-year (YOY) margin performance. The credit rating confirmations acknowledge the higher than expected YE2023 leverage owing largely to the Company’s heavy network investment and spectrum license acquisitions over the last two to three years, which was partially offset by better-than-expected free cash flow. The Stable trends reflect Morningstar DBRS’ expectation of stable low-to-mid single-digit EBITDA growth through our forecast horizon, that capital intensity and the dividend payout ratio will moderate in 2024, and that the long-term leverage profile is expected to improve over our forecast horizon.

CREDIT RATING DRIVERS
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 credit 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 in which leverage was expected to remain at 3.5 times (x) or higher for an extended period, a negative credit rating action could occur.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS expects BCE/Bell Canada’s future earnings profile to benefit from the fibre-to-the-premise (FTTP) footprint expansion to more than 8.0 million locations expected by YE2025, a continued increase in 5G wireless coverage, strong growth in mobility and Internet anchor cross-selling, the benefits of streamlining internal operations such as billing, cost savings associated with workforce reductions, and asset divestitures. Morningstar DBRS forecasts BCE/Bell Canada’s 2024 consolidated revenue to increase in the low- to mid-single-digit range to between $25.0 billion and $25.5 billion and expects the consolidated EBITDA margin to be roughly flat YOY.

FINANCIAL OUTLOOK
Morningstar DBRS expects BCE/Bell Canada’s financial profile to stabilize in 2024 and improve in 2025, reflecting a moderation in the Company’s capital expenditure program, the benefits of severance/restructuring actions taken in 2024 and continued steady earnings growth. While upcoming spectrum auction costs are not expected to result in a negative credit event, the material dividend remains a key credit consideration. Although near-term leverage is expected to remain more than 3.0x, the leverage profile is expected to improve as a result of several initiatives to increase financial flexibility including lowering the dividend growth rate to approximately 3% from approximately 5% previously, maintaining a lower level of capital intensity than in the 2020–23 period, cost base streamlining and restructuring initiatives, and, finally, the divestiture of nonstrategic and real estate assets.

CREDIT RATING RATIONALE
The credit ratings are supported by the Company’s considerable size and scale, leading market position in wireline and wireless services, and other revenue diversification. BCE/Bell Canada is the incumbent telecommunications provider in Ontario, Québec, Atlantic Canada, and Manitoba and is growing its presence in Western Canada with a diverse suite of wireline and wireless products. The Company also operates one of the largest media companies in Canada.

The Company has invested heavily into both its wireless and wireline segments. Planned FTTP and wireless-to-the-premise build-out is expected to be approximately 90% complete by year-end 2025 and BCE/Bell Canada continues to rollout 5G availability and improve wireless performance. BCE/Bell Canada’s network sharing agreement with TELUS Corporation (rated BBB with a Stable trend by Morningstar DBRS) facilitates operational and capital synergies including interconnection and roaming, software and technology, and network construction.

The credit 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 change.

Morningstar DBRS notes that operations are subject to a relatively high degree of regulation by the Canadian Radio-television and Telecommunications Commission; Innovation, Science and Economic Development Canada (formerly Industry Canada); and the Competition Bureau, all of which are focused on keeping the Canadian communications landscape competitive.

TRANSACTION-SPECIFIC DISCLOSURES
This disclosure includes any financial statement adjustments that deviate materially from those contained in the issuer’s published financial statements.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of BCE/Bell Canada/Bell-MTS Inc., the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of BCE/Bell Canada/Bell-MTS Inc., the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of BCE/Bell Canada/Bell-MTS Inc., the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Communications Industry (July 20, 2023), https://dbrs.morningstar.com/research/417420
-- Global Methodology for Rating Companies in the Broadcasting Industry (March 14, 2023), https://dbrs.morningstar.com/research/410794

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 19, 2023), https://dbrs.morningstar.com/research/422134
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (September 27, 2023), https://dbrs.morningstar.com/research/421119
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023), https://dbrs.morningstar.com/research/411694
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023), https://dbrs.morningstar.com/research/410196

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 [email protected].

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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