DBRS Confirms BCE and Bell Canada Ratings, Stable Trends

DBRS has today confirmed the long- and short-term ratings of BCE Inc. (BCE) and its wholly-owned operating subsidiary, Bell Canada, at A (low) and R-1 (low). The trends are Stable. DBRS’s ratings are based on the credit profile of Bell Canada, which is the debt issuer for the group and is directly supported by the wireline, wireless and video operations of Bell Canada and its subsidiaries. BCE’s ratings reflect the structural subordination of any debt (currently none outstanding) and its preferred obligations relative to Bell Canada, which provides a significant portion of the support for BCE’s obligations.

Bell Canada’s ratings continue to reflect: (a) a good business risk profile that is manageable in a competitive operating environment; and (b) a healthy financial risk profile that has improved over the past year as a result of the significant debt reduction undertaken during 2009.

DBRS notes that Bell Canada continues to focus on repositioning itself to improve its capabilities and competitive position in a market where it faces one or more competitors for all of its services – wireline, wireless and video – in both its residential and enterprise customer segments.

This repositioning has recently included: (a) rolling out a jointly built – with TELUS Corporation – national wireless network (using a high-speed packet access (HSPA) platform) in 2009; (b) continuing to focus on upgrading its wireline network in 2010 with fibre initiatives that include fibre-to-the-home (FTTH), among others; and (c) investing in its video solutions, Bell TV, including satellite and launching a terrestrial-based IPTV service. Some of this repositioning was seen in Bell Canada’s wireless and video businesses in 2009, with strong subscriber flow and good EBITDA growth. While access line erosion continued at around the mid-single-digit range, residential line losses continued to decline modestly in 2009 (both on an absolute and percentage basis), while business losses roughly doubled due to the downturn in the economy. Wireless ARPU, down 4.8% in 2009, was another area of pressure in 2009 as voice pressure, due to the anticipation of new competition and lower roaming revenue due to the weak economy, offset strong data growth.

DBRS expects the operating environment to remain competitive for all services, particularly in wireless, with new entrants expected to have some impact on the current three-player national wireless market in Canada. However, DBRS believes that Bell Canada, with its HSPA and CDMA networks, should be better equipped to compete more effectively in both the residential and enterprise segments. DBRS also notes that customer service and cost efficiencies are the other areas of improvement that Bell Canada continues to focus on. In a competitive environment, these are crucial factors and can serve to help or hurt Bell Canada’s competitive position.

These initiatives and Bell Canada’s ability to bundle its services should help to drive data and wireless growth and stem some of the competitive pressure on access lines in 2010, with further improvement likely in 2011. DBRS believes that the combination of these factors should lead to continued modest EBITDA growth for Bell Canada, with EBITDA expected improve to close to $6.0 billion in 2010 and EBITDA margins remaining steady at or just under the 40% level. This level is considered healthy for a diversified telecom operator in North America.

From a financial perspective, DBRS believes that BCE/Bell Canada’s financial risk profile should also remain healthy at current levels throughout 2010 – in line with its fairly conservative leverage targets – after reducing debt by roughly $1.4 billion. DBRS notes that debt-to-EBITDA declined to 1.5 times and cash flow-to-debt improved to 0.45 times in 2009.

Furthermore, by continuing to generate modest EBITDA growth and with its roughly $300 million distribution from Bell Aliant Regional Communications LP expected to remain stable in 2010, BCE/Bell Canada should be able to: (a) continue to invest capital in growth areas such as broadband and wireless at an overall healthy level (mid-teens as a percentage of total revenue); (b) pay a dividend that is tied to earnings growth; and (c) cover its annual cash pension costs/contributions.

While BCE has increased its dividend three times in 2009, DBRS notes that there is likely to be constant pressure for increasing shareholder returns going forward. BCE/Bell Canada appears to be committed to its conservative financial policy and a dividend tied to earnings growth, with a Normal Course Issuer Bid (NCIB) program of $500 million during 2010.

After significant de-leveraging and refinancing in 2009, BCE/Bell Canada has a more manageable debt maturity schedule over the next four years, with $1.1 billion maturing over this time frame (or $750 million, excluding 2010 maturities for which $400 million of its cash has been earmarked).

DBRS believes that Bell Canada remains ideally placed at the A (low) level, as it operates in a highly competitive environment and needs to continue to better position itself before a more steady equilibrium is found for all of its services. Should Bell Canada appreciably execute on: (a) repositioning itself to better compete in this highly competitive environment; (b) upgrading its networks; and (c) further improving its customer retention rates through enhanced services and customer service, DBRS could, provided that a steady financial risk profile and balanced shareholder returns are demonstrated, reconsider Bell Canada’s ratings in the future.

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

The applicable methodologies are Rating Telecommunications and Rating Wireless, which can be found on our website under Methodologies.

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

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