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Fitch Downgrades BCE

Fitch Ratings says it is revising its outlook for BCE and Bell Canada to negative to reflect the increasingly competitive market

November 18, 2005

3 Min Read

CHICAGO -- Fitch Ratings has revised the Rating Outlook for the long-term debt ratings of BCE Inc. (BCE) and Bell Canada to Negative from Stable. Approximately C$11 billion of public debt securities are affected by these actions. The Negative Rating Outlook applies to the following ratings by Fitch:


  • Senior Unsecured debt 'A-';

  • IDR 'A'.

Bell Canada

  • Senior Unsecured debt 'A';

  • IDR 'A';

  • Subordinate debt 'A-'.

The Negative Outlook reflects the increasingly competitive environment, which is causing higher levels of erosion to Bell Canada's legacy voice products for local access and long-distance services. Expectations are for access-line erosion to accelerate over the next couple of years as cable operators and other entrants launch voice-over-Internet protocol (VoIP) offerings. In addition, Fitch believes wireless substitution will increase over time, following trends experienced by U.S. operators, causing greater access line declines. Margins continue to be pressured by significantly higher churn and increased cost of acquisition in the wireless segment and weak operating performance due to several factors in the wireline segment.

The ratings are supported by Bell Canada's dominant market position, stable regulatory climate, sizable cash generation, and considerable nonstrategic assets. In addition, while business risk is increasing, Bell Canada's diversified operations in growth areas including wireless, digital subscriber lines (DSL), business IT services, and video should mitigate the revenue erosion. When factoring in productivity and cost-structure improvements, Bell Canada should be able to maintain and potentially grow free cash flow levels. These growth services are typically lower margin services, except for wireless, putting additional pressure on profitability. However, Bell Canada has significantly less exposure to wireless compared with its peers (18% compared with 42% at TELUS), as Fitch believes wireless is an increasingly important and growing offset to the fixed-line losses. While wireless operating margins are solid, the trends in operating performance have lagged its peer group over the past several quarters due in part to a billing system conversion.

Bell Canada appears to be making sufficient progress with the Galileo restructuring program that aims to remove approximately $1 billion-$1.5 billion in annualized costs by year-end 2006. Bell Canada's ability to bundle its services and drive new revenue growth coupled with cost improvements to offset access line erosion will ultimately determine the sustainable long-term credit profile. Fitch also believes that further debt reduction is necessary to mitigate the increasing business risk, and Bell Canada has several options for further deleveraging. However, uncertainty exists to the extent bondholders would benefit from excess cash from an asset sale or FCF generation as the company is reviewing options to optimize shareholder value.

BCE's liquidity is solid owing to the company's free cash flow, manageable maturity schedule, cash on hand, accounts receivable securitization program, and available bank lines although free cash flow relative to the company's debt level is low for its rating category. Last 12 months (LTM) free cash flow at BCE was approximately $225 million. Providing access line erosion does not increase beyond expectations, Fitch expects relatively stable financial metrics going forward. As of Sept. 30, 2005, total adjusted debt to operating EBITDAR for BCE was 2.4 times (x). BCE has approximately $1.3 billion of debt maturing over the next year. During 2005, debt increased by approximately $800 million, primarily due to an increase in capital lease obligations and small acquisitions.

Additionally, upon closer review of BCE and Bell Canada consolidated operations, Fitch has upgraded the IDR at BCE to 'A' from 'A-' to more closely reflect our opinion that the default risk of BCE and Bell Canada are the same given the consolidated nature of the two companies and BCE's dependence on Bell Canada's cash flow to meet debt service obligations.

Fitch Ratings Ltd.

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