DBRS Rates Télébec, L.P. and NorthernTel, L.P. Debentures at BBB (high)

Dominion Bond Rating Service (“DBRS”) has today assigned ratings to the debentures of both Télébec, Limited Partnership (“Télébec”) and NorthernTel, Limited Partnership (“NorthernTel” or collectively the “Partnerships”) at BBB (high) with a Stable trend.

The BBB (high) ratings of both Télébec and NorthernTel are underpinned by the dominant telecommunications market positions in the regional markets that these Partnerships serve. This has resulted in above-average EBITDA margins of 50% and continued strong and stable cash flow from operations attributable to a less intense competitive environment for traditional wireline services due to high-cost service areas and low population density detracting competitors. DBRS notes that the Partnerships’ ratings also reflect a reasonable capital structure with modest debt levels, along with continued free cash flow generation despite a high proportion of its cash being distributed to its unit holders.

Although the parent of the Partnerships, Bell Nordiq Group Inc., has seen a transfer in ownership from Bell Canada to the new Bell Aliant Regional Communications Income Fund, DBRS views this event as neutral as the Company will continue to benefit from access to technology and branding from the greater BCE group. However, DBRS notes that the Partnerships’ ratings are capped at the BBB (high) level in its current configuration as the Partnerships face limitations in relation to size, lack of organic growth opportunities given its limited population base, and its operations being in lower-growth economic regions.

DBRS acknowledges that the Partnerships could be increasingly impacted by technological changes that could potentially circumvent its current last-mile advantage. As a result, the Partnerships may be forced to respond with lower-priced product bundles or launching new services where margins are lower. Therefore, free cash flow could become pressured either through margin pressure or potentially higher capex to respond to competitive threats. Although the Partnerships have been relatively immune to access line erosion, this could accelerate as larger cable operators in parts of the Partnerships’ footprint are likely to become more aggressive with their VoIP services. This could lead to pricing pressure on both Télébec’s and NorthernTel’s core local voice operations, which still represent 45% of overall revenue.

DBRS notes that the Partnerships have been trying to diversify operations both geographically and by product line, with the announcement of a contemplated alliance with TBayTel, while seeking to increase penetration rates of both broadband and wireless.

In addition, DBRS has also confirmed the stability rating of the Bell Nordiq Income Fund (“Bell Nordiq”) at STA-2 (high) (please see separate press release).