DBRS Assigns BB (low) Issuer Ratings to BCE Acquisition Inc. and Bell Canada, Downgrades Existing Bell Canada Debt, Stable Trend

DBRS has today assigned BB (low) Issuer Ratings to BCE Acquisition Inc. (BAI) and Bell Canada, a wholly owned subsidiary of BCE Inc. (BCE or the Company). Additionally, DBRS has assigned recovery and instrument ratings to Bell Canada’s existing debt and BAI’s approximately $32 billion of new debt. Specifically, DBRS has assigned a recovery rating of RR1 to Bell Canada’s legacy senior debt (now secured) and downgraded its instrument rating to BBB (low) from “A” and assigned a recovery rating of RR6 to Bell Canada’s subordinated debt and downgraded its instrument rating to B from BBB (high). DBRS has assigned recovery ratings of RR1, RR3 and RR6 to BAI’s secured, unsecured senior and unsecured subordinated debt, respectively, and instrument ratings of BBB (low), BB and B, respectively. All trends are Stable. DBRS has also discontinued the short-term ratings of BCE and Bell Canada as these instruments will be or have been repaid. Once the privatization is complete, the remaining BCE debt and preferred shares will be discontinued after they are repaid. (DBRS will publish a full report today that will provide additional analytical detail on this rating action.)

These actions are based on the assumption that the Company completes its privatization on or before December 11, 2008, for $42.75 per common share (equity value of approximately $35 billion; enterprise value of approximately $52 billion) as planned. Should this or any element of the transaction change, DBRS would re-evaluate its ratings. The privatization was originally announced on June 30, 2007, and led by Ontario Teachers’ Pension Plan Board, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. Subsequently, Merrill Lynch took up an equity commitment as a principal investor. Collectively, the sponsors will invest $7.75 billion in equity (possibly lower due to cash accumulation at BCE) to fund this transaction, with the remainder in debt.

Today’s action concludes DBRS’s review, which consisted of a comprehensive evaluation of the privatization, the business risk profile of BCE and its operating subsidiaries, the financing involved to fund the privatization and the resulting financial risk profile, which, when completed, will have increased and consist of a significant amount of leverage.

DBRS had initially placed the ratings of BCE and Bell Canada Under Review with Negative Implications on April 17, 2007, following the Company’s announcement that it was reviewing its strategic alternatives with a view to maximizing shareholder value. This status was maintained by DBRS on July 3, 2007, following the Company’s announcement that its board had agreed to recommend a transaction to privatize the Company; on November 27, 2007; again on June 20, 2008, following a ruling by the Supreme Court of Canada allowing the privatization to proceed (see the related press releases and rating report). DBRS notes that the financing package was finalized on July 4, 2008.

DBRS’s BB (low) Issuer Ratings on BAI and Bell Canada are the same based on a consolidated view of BAI/Bell Canada (including Bell Canada’s operating subsidiaries and excluding Bell Aliant Regional Communications, Limited Partnership (Bell Aliant)) for the following reasons: (1) Bell Canada and its operating subsidiaries are the significant guarantors to BAI’s debt and provide the cash flow to support this debt at BAI and (2) the guarantees provided from Bell Canada and its major operating subsidiaries to BAI tie these entities together on an irrevocable and unconditional basis.

DBRS’s ratings assigned today reflect the two key elements of credit: the risk of default and the likely loss/recovery in the event of default as outlined in DBRS’s Leveraged Finance Rating Methodology (released June 9, 2008, and available at www.dbrs.com). Firstly, DBRS’s Issuer Ratings of BB (low) on BAI and Bell Canada indicate DBRS’s assessment of the likelihood of default of BAI and Bell Canada. Secondly, the recovery ratings assigned to various instruments at BAI and to Bell Canada’s legacy senior debt reflect DBRS’s assessment of the recovery prospects of those debt issues based on their rank and collateral. Finally, DBRS’s instrument ratings blend the two elements – default and loss/recovery – in a single rating that may be above, below or the same as the issuer rating.

DBRS notes that the consolidated financial risk profile has changed significantly for BAI/Bell Canada on a pro forma basis, falling to below investment-grade level. Gross debt-to-12 month trailing EBITDA at Bell Canada (excluding Bell Aliant and its cash distribution) will increase from below 2.0 times at June 30, 2008, to 6.5 times on a pro forma basis. Notwithstanding the higher financial risk profile, DBRS expects the business risk profile of BAI/Bell Canada to remain largely intact and continue to exhibit investment grade-like characteristics.

The investment-grade business risk profile will continue to include (1) Bell Canada’s 7.6 million incumbent access lines and healthy EBITDA margins of just under 40% despite ongoing fixed-line competition; (2) revenue and EBITDA growth generated from the 6.3 million subscribers to Bell Mobility Cellular Inc. (Bell Mobility) and the 1.8 million subscribers to Bell TV (under Bell ExpressVu), notwithstanding some competitive challenges experienced at Bell Mobility and the expectation of new competitors entering the wireless market in 2009; (3) a notable cash distribution from Bell Aliant (just under $300 million per year under the current configuration); and (4) further operating flexibility to better compete with the cable operators arising from reduced regulation in 2007 along with new customer-service initiatives. In addition, DBRS expects the sponsors and the new CEO, George Cope, to continue to pursue cost-saving initiatives that began with his appointment in July 2008. These initiatives are expected to create sizable operating synergies and improve the Company’s competitiveness.

While DBRS expects cash flow from operations to be pressured as a result of higher interest costs going forward, the benefits of cash tax savings and the cancellation of its dividends (common and preferred that totaled $1.27 billion in 2007) are expected to result in the Company continuing to generate positive free cash flow on an annual basis over the next three years. This free cash flow, in addition to possible asset sales, should allow the Company to repay a portion of its nearly $39 billion of BAI/Bell Canada debt over time. Additionally, DBRS expects liquidity levels to be sufficient given this free cash flow expectation and its reasonable maturity schedule.

DBRS notes that the legacy Bell Canada senior public debt that will likely remain outstanding following the closing of the privatization is $4.9 billion. This, and other new senior debt at Bell Canada, will benefit from security in the form of a first-lien pledge of Bell Canada’s wireline assets and has outstanding prospects for full recovery given the significant value of these operations. As such, DBRS has assigned Bell Canada’s Debentures and MTN Debentures a recovery rating of RR1 (90% to 100% expected recovery) and an instrument rating of BBB (low), three notches above Bell Canada’s BB (low) Issuer Rating.

DBRS has also evaluated the guarantees and asset security pledges associated with $32 billion of new debt at BAI ($21 billion on a secured basis and $11.3 billion on an unsecured basis). This debt will effectively be supported by Bell Canada and other operations, including Bell Mobility and Bell ExpressVu. Bell Canada’s support of BAI’s new secured debt will come from senior and subordinated guarantees from Bell Canada and pledges on the assets of Bell Canada, Bell Mobility and Bell ExpressVu. The ratings on BAI’s unsecured notes ($11.3 billion on a senior and subordinated basis) reflect their rank below the secured debt at both BAI and Bell Canada. Furthermore, the rating on Bell Canada’s existing subordinated unsecured debt reflects its ranking and recovery prospects, which is minimal as it will be subordinated to more than $38 billion of debt.

DBRS notes the new BAI senior secured credit facility ($21 billion, with a $2 billion undrawn revolver) will benefit from (1) a guarantee from Bell Canada security (both on a senior basis up to the amount permissible under its 1976 indentures with the remainder on a subordinated basis) and first lien on its assets and (2) a guarantee from BAI’s other subsidiary companies such as Bell Mobility and Bell ExpressVu and a first lien on their assets. Given the value of these businesses, BAI’s secured debt has outstanding prospects for full recovery. As a result, DBRS has assigned BAI’s secured debt a recovery rating of RR1 (90% to 100% expected recovery) and an instrument rating of BBB (low), three notches above BAI’s BB (low) Issuer Rating.

DBRS notes the BAI senior unsecured debt ($7.5 billion) will be supported by subordinated guarantees from BAI’s operating subsidiaries: Bell Canada, Bell Mobility and Bell ExpressVu. This debt has good recovery prospects, with a recovery of approximately two-thirds expected under a base case default-recovery scenario. As such, DBRS has assigned BAI’s Senior Unsecured Notes a recovery rating of RR3 (50% to 70% expected recovery) and an instrument rating of BB, one notch above BAI’s BB (low) Issuer Rating.

DBRS notes the BAI Subordinated Unsecured Notes ($3.8 billion) will be supported by subordinated guarantees from BAI’s operating subsidiaries: Bell Canada, Bell Mobility and Bell ExpressVu. This debt has poor recovery prospects under a base case default-recovery scenario. As such, DBRS has assigned the BAI Subordinated Unsecured Notes a recovery rating of RR6 (0% to 10% expected recovery) and an instrument rating of B, which is two notches below BAI’s BB (low) Issuer Rating. DBRS notes that under a base case default-recovery scenario, the value of the supporting operating entities has already been pledged to more than $35 billion of debt that ranks ahead of this subordinated debt.

DBRS notes the Bell Canada subordinated unsecured debt ($275 million) will be supported by any residual value of Bell Canada after the BAI and senior Bell Canada debt claims have been made. This debt has poor recovery prospects under a base case default-recovery scenario. As such, DBRS has assigned the Bell Canada subordinated unsecured debt a recovery rating of RR6 (0% to 10% expected recovery) and an instrument rating of B, two notches below Bell Canada’s BB (low) Issuer Rating and the same as the BAI subordinated unsecured debt rating as both instruments can expect negligible recovery. However, these notes are ranked beneath the BAI subordinated notes and hence are further disadvantaged.

DBRS notes that its ratings of Bell Aliant (BBB (high) and R-1 (low)), Télébec, Limited Partnership (BBB (high)) and NorthernTel, Limited Partnership (BBB (high)) continue to remain unaffected following this privatization of their controlling shareholder. Given the BCE/Bell Canada control of Bell Aliant, similar operating synergies are likely to be initiated at this entity. This should be to the benefit of all of its unitholders, including BCE/Bell Canada’s 44% equity stake. Going forward, DBRS believes that while there is nothing precluding BCE’s new owners from pursuing various possible initiatives involving its ownership of Bell Aliant, there has been no indication of any such initiatives to date. Any such initiatives could potentially affect the ratings of Bell Aliant and its subsidiaries in the future.

DBRS will be hosting a teleconference on Thursday, October 9, 2008, to discuss the rating actions concerning BCE Inc. and Bell Canada and related events in the market place.

Teleconference Details
Conference Date: Thursday, October 9, 2008, at 12:00 p.m. ET
Dial-In Number(s): +1 416 695 7806 and +1 888 789 9572
Participant Pass Code: 3272581

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

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