Morningstar DBRS Downgrades Bell Canada's Issuer Rating to BBB From BBB (high), and BCE Inc.'s Issuer Rating to BBB (low) From BBB, With Stable Trends; Removes Under Review With Negative Implications Status

DBRS Limited (Morningstar DBRS) downgraded Bell Canada's Issuer Rating to BBB from BBB (high) and BCE Inc.'s. (BCE or the Company) Issuer Rating to BBB (low) from BBB. Consequently, Morningstar DBRS removed the credit ratings from Under Review with Negative Implications, where they were placed on November 5, 2024. Morningstar DBRS also downgraded Bell Canada's Debentures and MTN Debentures credit rating to BBB from BBB (high), Commercial Paper credit rating to R-2 (middle) from R-2 (high), and Subordinated Debentures credit rating to BB (high) from BBB (low). In addition, Morningstar DBRS downgraded BCE's Short-Term Issuer Rating to R-2 (low) from R-2 (middle) and Unsecured Debentures credit rating to BBB (low) from BBB. BCE's All Classes Preferred Shares credit rating was confirmed at Pfd-3. All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The downgrade of the Issuer Ratings on Bell Canada and BCE primarily reflects a deterioration in the Company's financial profile. When considering announced acquisition and divestiture activity, future capital funding programs, capital conservation measures (i.e., dividend reduction), and the maturation of the Canadian telecommunication industry, leverage is expected to remain higher than what is acceptable for the BBB (high) credit rating through Morningstar DBRS' forecast horizon.

While Morningstar DBRS views the recently announced reduction in the annual dividend to $1.75 per share from $3.99 per share as a credit positive development, the 2024 starting point for the recently announced deleveraging plan at 3.9 times (x) was higher than expected. In terms of future capital allocation, Morningstar DBRS views the recently announced long-term strategic partnership with the Public Sector Pension Investment Board (PSPIB) as a means to develop this business in a capital-efficient manner, given the Company's commitment to this growth strategy through the $5.0 billion acquisition of Northwest Fiber, LLC, doing business as Ziply Fiber (Ziply), which is expected to close in H2 2025.

However, when accounting for these credit rating enhancements and recognizing an estimated 0.2x benefit in leverage reduction related to the Q1 2025 issuance of $4.5 billion in subordinated notes that have received 50% equity treatment until 2046, Morningstar DBRS expects gross leverage to remain in the range of 3.50x to 3.75x over the next three years (until 2027).

The tailwind of a rapidly growing mobile and high-speed internet market since 2020 has slowed materially recently, and the Canadian telecommunications market is showing signs of a rapidly maturing industry with declining average revenue per user, an uptick in churn, and acceleration in the loss of legacy services. Further, the competitive environment has intensified as Rogers Communications Inc. (rated BBB (low) with a Positive trend) has completed the integration of the Shaw Communications Inc. assets into its national footprint. Vidéotron's mobile rollout has been gaining traction as it leverages the challenger brand strategy. This industrywide pressure appears to be reflected in the Company's 2025 revenue guidance (-3.0% to +1.0% year-over-year (YOY)), which considers The Source store closures but also relies materially on achieving internal cost efficiencies in order to drive positive operating leverage.

The Stable trends reflect the Company's credit positive decisions (i.e., the dividend reduction, the PSPIB partnership) that are expected to support the generation of surplus Morningstar DBRS-calculated free cash flow (FCF; after dividends but before changes in working capital) in 2025, which is expected to increase through Morningstar DBRS' forecast horizon. It also incorporates Morningstar DBRS' expectation of flat to low-single digit EBITDA growth from 2025 to 2027, no future growth in the annual dividend, the closing of the Ziply and Maple Leaf Sports & Entertainment Ltd. transactions in H2 2025, the launch of the PSPIB partnership in H2 2025, and modest improvement in the Company's financial profile.

CREDIT RATING DRIVERS
If BCE/Bell Canada were to deleverage as a result of EBITDA growth and/or the application of FCF generated by operations or through liquidity event(s) used for debt reduction, such that leverage declines sustainably toward 3.0x, while maintaining the Company's earnings profile, a positive credit rating action could occur.

Conversely, if BCE/Bell Canada experienced a deterioration in its credit metrics as a result of weaker-than-expected operating performance, lower cash flow, and/or more-aggressive-than-expected financial management in which leverage was expected to be in excess of 3.75x or higher for an extended period, a negative credit rating action could occur.

EARNINGS OUTLOOK
Morningstar DBRS forecasts 2025 revenue to decline modestly YOY, primarily attributable to lower product revenue, closing of The Source stores, and a continuing decline in legacy telephony revenue, partially offset by growth in internet, digital advertising, and business services and the impact of the Ziply acquisition in H2 2025. Looking ahead to the medium term, Morningstar DBRS forecasts revenue to grow in the low single digit range through 2027, primarily driven by high-speed internet, wireline business services, a stabilization in wireless service revenue, and the continued migration toward digital advertising within the Company's Media group. Morningstar DBRS expects EBITDA margins to improve modestly in 2025 compared with 2024, primarily reflecting cost efficiencies in the Communications and Technology Services division. Looking ahead, EBITDA margins are expected to remain in the 43% to 44% range, as the Company focuses on high-value subscribers, pricing discipline, and churn management. As such, Morningstar DBRS forecasts EBITDA to grow to between $11.25 billion and $11.5 billion by 2027 from approximately $10.6 billion in 2025.

Morningstar DBRS acknowledges the considerable uncertainty created by the rapidly evolving competitive dynamic within the Canadian telecommunications landscape, the potential risk of capital associated with the U.S. fibre wholesale market strategy, and the potential for regulatory pressures. However as a national incumbent, the Company has several means to drive earnings performance, including improving flow-through to EBITDA as a result of ongoing cost efficiencies, the increased use of fibre in the network, the ability to capture high-margin subscribers and bundle multiline solutions, and growth in business services.

FINANCIAL OUTLOOK
Morningstar DBRS forecasts a surplus FCF (after dividends but before changes in working capital and principal lease payments) in 2025 compared with the modest net deficit position in the proceeding five years as (1) operating cash flow continues to trend in line with earnings growth, (2) capital intensity is expected to be in the 14% to 15% range ($3.5 billion to $3.7 billion), and (3) the gross dividend outlay declines to $2.0 billion in 2025 and further declines to approximately $1.6 billion beginning in 2026 (compared with $3.7 billion in 2024). As a result, Morningstar DBRS FCF is expected to grow to approximately $2.5 billion in 2027 from about $2.0 billion in 2025. Morningstar DBRS expects that the majority of the FCF surplus after principal lease payments, investment in the PSPIB partnership, other investments, and spectrum will go toward reducing outstanding debt (as will net proceeds of noncore asset divestitures). Combined with the projected growth in EBITDA, Morningstar DBRS expects debt-to-EBITDA to improve toward 3.7x in 2025 and move toward 3.5x by 2027.

While uncertainty related to the competitive landscape and the risk of capital related to the U.S. fibre expansion could pressure BCE/Bell Canada's operating performance and reduce credit metrics to less than Morningstar DBRS' projections, Morningstar DBRS believes that the Company will have sufficient headroom within the current BBB credit rating category to absorb some downward pressure on credit metrics.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA)*: BBB (high)
BCE/Bell Canada's business risk assessment reflects the Company's considerable size and scale, leading market position in wireline and wireless services, and other revenue diversification. BCE/Bell Canada is the incumbent telecommunications provider in Ontario, Québec, Atlantic Canada, and Manitoba and is growing its presence in Western Canada with a diverse suite of wireline and wireless products. The Company has invested heavily in both its wireless and wireline segments. Planned fibre-to-the-premises and wireless-to-the-premises build-out is largely complete, and BCE/Bell Canada continues to roll out 5G availability and improve wireless performance. BCE/Bell Canada's network sharing agreement with TELUS Corporation (rated BBB with a Stable trend) facilitates operational and capital synergies, including interconnection and roaming, software and technology, and network construction. Morningstar DBRS notes that operations are subject to a relatively high degree of regulation by the Canadian Radio-television and Telecommunications Commission; Innovation, Science and Economic Development Canada (formerly Industry Canada); and the Competition Bureau Canada, all of which are focused on keeping the Canadian communications landscape competitive.

Comprehensive Financial Risk Assessment (CFRA)*: BB (high)/BBB (low)
BCE/Bell Canada has a history of strong earnings and operating cash flows, which have been largely offset by a large dividend commitment. High levels of capital expenditure have enabled the Company to provide 5G mobile service and fibre-to-the home, and spectrum purchases have been primarily funded by debt. Looking ahead, Morningstar DBRS expects the Company to maintain its revised dividend for the near future and it does not anticipate share repurchase activity through Morningstar DBRS' forecast horizon. Capital intensity is expected to be in the range of 14.0% to 15.0% and significantly less than the 19% average over the four-year period from 2020 to 2024. Leverage, as measured by gross debt-to-EBITDA, is expected to be approximately 3.5x to 3.75x through 2027. Liquidity is considered adequate to meet near-term cash commitments. The Company had more than $1.0 billion in cash and approximately $4.7 billion in total liquidity as of March 31, 2025.

Intrinsic Assessment*: BBB
The Intrinsic Assessment is determined based on forward-looking assessment of the CBRA and CFRA, while also taking into consideration industry peers, among other factors.

*Other Considerations
The Intrinsic Assessment reflects Bell Canada credit ratings. BCE credit ratings receive a one-notch downward adjustment for parent-subsidiary structural subordination.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's Intrinsic Assessment can be found https://www.dbrsmorningstar.com/research/454292.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025) https://dbrs.morningstar.com/research/447184.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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