DBRS Confirms STA-2 (high) Rating for Bell Aliant Regional Communications Income Fund

DBRS has today confirmed the STA-2 (high) Stability Rating of Bell Aliant Regional Communications Income Fund (Bell Aliant Fund or the Fund). However, DBRS notes that event risk has increased for Bell Aliant Fund given the ownership changes that are to occur with BCE Inc. (BCE), which currently has the right, through its ownership and partnership agreements with Bell Aliant Regional Communications, Limited Partnership (Bell Aliant L.P.), to nominate the board that controls the operating companies of the Fund.

The new owners of BCE have announced plans to put in place a highly leveraged capital structure at BCE. DBRS notes that Bell Aliant Fund, Bell Aliant L.P. and other related operating companies in the Fund group have been specifically carved out from providing any form of security or guarantee to the new debt being issued by BCE. DBRS highlights that increasing leverage at Bell Aliant L.P. for use at BCE may be an attractive prospect to the new owners. Such an event may require a cut in the distribution paid by the Fund as cash is diverted to fund the increased interest expense. DBRS has no reason to believe that this type of event will occur and notes that an alternative event may be to increase leverage to repurchase units of the Fund. DBRS has therefore not factored these potential events into the Stability Rating.

The Stability Rating is supported by the following factors: stable cash flow from land-line operations located in less-competitive markets; sufficient size and scale; geographic diversification with a contiguous network; a reasonable target payout ratio of 90%; and a reasonable financial profile. A rating in the STA-2 range reflects the high level of capital expenditure required for operations, currently 16% of revenue.

However, Bell Aliant Fund operates in less competitive markets and has fully upgraded networks that should be able to sustain its current business model in the short to medium term without the need to increase capital expenditures significantly.

DBRS notes that distributions to unitholders should remain stable since less than 50% of Bell Aliant Fund’s footprint competes with cable operators and the Fund remains the sole provider of some telecommunications services for these customers. Given the low population density in many of these markets, DBRS does not believe cable operators will expand their networks into these markets in the near term because it generally remains uneconomically feasible. While access-line erosion in most areas is expected to remain minimal for Bell Aliant Fund, DBRS does anticipate some line erosion in markets that are more competitive. However, growth opportunities in DSL and cost synergies should offset most of this competitive pressure and, hence, distributions should remain stable. Furthermore, the Fund should be in a position to realize cost synergies through its contiguous network, which has improved scale following the BCE asset swap.