DBRS Confirms Bell Canada and BCE Inc. 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. The confirmation also reflects the operations of CTVglobemedia Inc. (CTVglobemedia), with this acquisition, announced in September 2010, expected to close in early Q2 2011. 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 reflect: (a) a good business risk profile that is manageable in a competitive operating environment with improvement in its networks and operating platforms in recent years strengthening its competitive position; (b) the acquisition of the 85% of CTVglobemedia and its television, digital media and radio businesses that it or BCE did not own; and (c) a reasonable financial risk profile that, after improving in recent years, will weaken slightly in the near term with slightly higher leverage following the acquisition of CTVglobemedia.

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. After launching its high-speed packet access (HSPA) wireless network in late 2009, 2010 saw Bell Canada take this network competitive advantage to the market where it gained strong flow share of new postpaid subscribers (1.3 million gross and more than 500,000 net subscriber additions, up 26.1% and 51.2% over 2009). While Bell Canada hopes to maintain a healthy level of subscriber growth while driving further high-value smartphone and wireless data growth, retention efforts for its wireless subscribers will also become a bigger focus going forward.

Separately, the Company’s multi-year fibre investment to enhance its wireline data speeds to better compete with cable will be leveraged with the launch of terrestrial television (IPTV) in Toronto and Montreal in 2011. By the end of 2013, Bell Canada plans to cover roughly 75% of its entire territory (4.8 million household) with this service while maintaining its satellite-based service for the remainder and out of region customers. This should put Bell Canada on a better competitive footing for both high-speed Internet and video services while bundling efforts stem further erosion in residential fixed-line access lines.

Also enhancing Bell Canada’s competitive position was the announcement in September 2010 of an agreement to acquire CTVglobemedia. DBRS believes that the acquisition of CTVglobemedia is fundamentally about a communications provider and television distributor – that is, Bell Canada – acquiring a content creator/wholesaler, CTVglobemedia. This vertical integration comes at a time when Bell Canada is expanding its traditional platforms, which deliver voice, data and video services, by creating new platforms such as IPTV, Internet-based television and mobile broadband services that can carry voice, data and video services. By owning 100% of CTVglobemedia, Bell Canada plans to use this content to leverage its broadband networks and accelerate the growth of its video service (currently 40% of Bell Canada’s total residential revenues) while continuing to pursue a cost structure that keeps it competitive.

While DBRS expects the operating environment to remain competitive for Bell Canada for all of its services, the Company should be better positioned, now that both its wireless and wireline networks have been upgraded. 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.

DBRS believes that the aforementioned drivers should lead to continued modest EBITDA growth for Bell Canada in 2011 as wireless growth offsets some wireline pressure as a result of its IPTV deployment. (This was the opposite case in 2010, when strong wireless subscriber loading affected wireless EBITDA in the short term and wireline, data and video, were the main growth drivers.) Including CTVglobemedia in 2011, DBRS expects the Company’s EBITDA to rise above the $6.3 billion level. While CTVglobemedia has a weaker business profile than Bell Canada, this business has reasonable EBITDA margins for a media company (above the 20% level). This new business mix will lead to a slight reduction in Bell Canada’s historical EBITDA margins, although they should remain in the upper 30% range, which is reasonable for a telco.

From a financial perspective, DBRS believes that BCE/Bell Canada’s financial risk profile should remain relatively healthy for 2011. Free cash flow should be reasonable as higher cash flow from operations offsets higher capex and dividend levels and credit metrics will be reasonable despite the increased leverage resulting from the CTVglobemedia acquisition. In addition, the movement to IFRS is expected to increase the Company’s percentage of debt in the capital structure to the mid-40% level (from the mid-30% level) with a lower equity base to asset and pension adjustments. However, with gross debt-to-EBITDA expected to be in the upper 1.5 to 2.0 times range and cash flow-to-debt declining to the mid 0.30 times level before likely improving in 2012, the Company’s financial profile remains reasonable for its A (low) rating.

Overall, DBRS believes that Bell Canada can maintain its ratings in a highly competitive market provided it can maintain its momentum to improve its competitive position, grow EBITDA, and reduce the pressure on its legacy businesses while maintaining a relatively healthy financial risk profile. One caveat that DBRS notes is that, in recent months, there has been significant regulatory activity in the Canadian communications industry. While this could have a considerable impact on the industry’s business risk profile, DBRS will assess these and any potential effects on the industry as/should they become apparent.

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

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