Fitch Affirms BCE and Bell Canada's IDR at 'BBB+'; Outlook Stable
By: Financial News
Fitch Ratings has affirmed the following long-term debt ratings of BCE Inc. (BCE) and Bell Canada.
BCE
--Issuer Default Rating (IDR) 'BBB+';
--Senior unsecured debt 'BBB+'.
Bell Canada
--IDR at 'BBB+';
--Senior unsecured debt 'BBB+';
--Subordinate debt 'BBB';
The Rating Outlook is Stable.
The affirmation is in response to BCE's announcement that the company intends to reorganize Bell Canada in its entirety into an income trust. The proposed conversion requires approval by the CRTC and 2/3 of its common stock shareholders at a special meeting that is expected to occur in January 2007. The initial level of annual distribution following conversion is anticipated in the range of $2.55 per unit share or approximately $2.1 billion annually, an increase from current shareholder distribution of $1.32 per share. The affirmation also assumes the trust conversion closes without material changes to the terms announced for the transaction.
The affirmation recognizes the ratings stability of Bell Canada's diversified operations, supported by its mobility segment as well as its leading market position as a local wireline operator. Bell Canada is attempting to mitigate the effects of revenue mix changes and margin pressures with a cost-restructuring program that aims to reduce operating expenses by $700 million-$900 million in 2006 and $600 million-$800 million in 2007. The company appears on track, with first-half cost savings for 2006 totaling $297 million. Fitch Ratings expects Bell Canada's diversified operations in growth areas, including wireless, digital subscriber lines (DSL), video, and business information and communications technology (ICT) solutions, should provide an offset to the legacy revenue erosion, although some uncertainty exists on whether Bell Canada can maintain margins through these mix changes and cost pressures, particularly if competitive threats are greater than expected. Fitch believes the trust conversion would exacerbate pressure on the rating in the event of greater than expected operational pressures or adverse changes in business conditions.
Consequently, Fitch views the announcement as a negative for Bell Canada's credit profile over the rating horizon. Fitch believes the trust conversion limits Bell Canada's financial flexibility given the intention to distribute the majority of its free cash flow to its shareholders and redeem approximately $2.8 billion of BCE and Bell Canada preferred shares through a tender offer. Bell Canada will use its cash balance of $1.8 billion coupled with expected proceeds of $1 billion from the Telesat monetization to fund the preferred buyback.
In addition, the trust conversion will likely trigger certain consent rights under bonds issued by Bell Canada having a face value of approximately $2 billion. Bell Canada expects to redeem any callable portions of debt. For the nonredeemable debt, Bell Canada will initiate negotiations with holders of those bonds and either redeem the debt or extend maturities. All other existing bonds of BCE and Bell Canada will continue to be outstanding. Accordingly, the company announced new committed unsecured credit facilities in the amount of $5.5 billion with maturities ranging from 18 months to 3 years to ensure sufficient liquidity through the trust conversion process.
The trust conversion does not affect Bell Canada's current financial policy targets as the company remains committed to net debt to EBITDA in the range of 1.5 times (x)-2.0x, and Fitch expects the company to stay within this target range under the trust structure. Current leverage (Debt to EBITDA) at the end of the second quarter for BCE was 1.9 times. While the trust structure limits the potential for meaningful debt reduction, Fitch had expected debt to be relatively constant since the company was well within leverage targets. The trust conversion will minimize cash tax payments and enable Bell Canada to redirect those funds to significantly increase operating cash flow, which Bell Canada intends to largely distribute to shareholders.
Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the ratings process other than through the medium of its public disclosure. Article Source: http://www.content.onlypunjab.com Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com
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