DBRS Confirms Bell Aliant Income Fund at STA-2 (high), Stable Trend

DBRS has today confirmed the Stability Rating of Bell Aliant Regional Communications Income Fund (Bell Aliant or the Fund) at STA-2 (high). The confirmation reflects the Fund’s underlying stable cash flow from operations of Bell Aliant Regional Communications, Limited Partnership (Bell Aliant LP), supported by its large regional and rural geographic coverage which remains generally less competitive that its peers; above-average EBITDA margins at the mid-40% level; and a manageable payout rate per unit ($2.90 per unit on an annualized basis) which has remained stable since 2008.

DBRS notes that while the Fund’s payout per unit rate has not been changed since 2008, its payout ratio as a percentage of cash flow available for distributions (on a DBRS-adjusted basis) has declined to below 85%. As cash flow available for distributions has grown, the Fund’s total distributions have remained steady.

Bell Aliant’s cash flow from operations is expected to remain steady at around $1.2 billion for 2009 and 2010 as growth in data services, cost structure streamlining and bundling efforts have offset pressure on its legacy voice services. With this, and lower capex levels going forward, DBRS expects cash flow available for distributions will increase appreciably from the current level of roughly $650 million to the end of 2010. This is expected to further underpin the stability of the Fund’s distribution until conversion.

Despite lower capex levels expected in 2009 and 2010, DBRS notes that Bell Aliant LP continues to deploy fibre technologies further into its fixed line network to support data, video and other services. This is expected to continue as Bell Aliant LP increasingly competes with cable operators who are expanding their networks (expected to cover roughly two-thirds of its territory by the end of 2009).

Given the Fund’s low-growth profile and taking into consideration the Canadian income fund tax legislation, DBRS does not expect the Fund to alter its distributions in 2009 or 2010. To date, the Fund has not detailed its corporate conversion plans; however, at this stage DBRS does not expect the Fund will covert prior to the end of 2010 and, hence, will continue to benefit from its favourable tax status. Meanwhile, the Fund’s payout ratio is likely to decline further (while total and per unit distributions are expected to remain stable) prior to the Fund’s ultimate conversion to a corporation.

With further clarity on the conversion rules and guidelines disseminated in 2009, DBRS notes that the Fund and Bell Aliant LP continue to explore ways to minimize the impact of becoming taxable on January 1, 2011. These considerations continue to include: preserving tax losses, strengthening its financial position, further productivity initiatives and repurchasing units prior to conversion. It remains uncertain which, if any, of these considerations will be pursued and whether distributions can be maintained upon conversion. DBRS will monitor the Fund’s plans in this regard until its ultimate conversion to a corporation.

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

The applicable methodology is Rating Telecom, which can be found on our website under Methodologies.

This is a Corporate (Telecom/Media/Technology) rating.