DBRS Morningstar Confirms BCE Inc./Bell Canada Ratings with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed BCE Inc.’s (BCE or the Company) Issuer Rating, Short-Term Issuer Rating, and Unsecured Debentures rating as well as the ratings of Bell Canada and Bell-MTS Inc. (the wholly owned subsidiary). All trends remain Stable. The rating confirmations reflect operating performances consistent with DBRS Morningstar’s expectations through 2020. The Stable trends incorporate the ongoing impact of the Coronavirus Disease (COVID-19) pandemic on future results, the recently announced $1.2 billion two-year accelerated broadband capital expenditure (capex) program, upcoming consecutive spectrum license auctions, continued dividend growth, and gross leverage through the late stage of the current 5G/Fibre capex cycle. The ratings are supported by the Company’s considerable size and scale as well as its leading market position in wireline services, number two market position in wireless with strong advances, , and other revenue diversification. The ratings also reflect intensifying competition, the expected loss of legacy wireline services revenues, and the risks associated with technological and regulatory change.

BCE Inc./Bell Canada’s earnings profile remained stable year over year (YOY) and in line with DBRS Morningstar’s expectations, which were issued in late March 2020 and incorporated DBRS Morningstar’s initial thoughts on the impact of the coronavirus. While consolidated revenue was $22.9 billion in 2020 (-3.8% YOY), which was softer than DBRS Morningstar’s estimate of $23.5 billion (-1.8% YOY), EBITDA of $9.6 billion in 2020 (-4.0% YOY) was essentially in line with the expected range of $9.5 billion to $10.0 billion. As expected, coronavirus-related measures taken by Bell Canada, which included waiving certain service fees for a designated period, in combination with reduced roaming activity throughout the year, stay-at-home restrictions that severely affected retail channels, and the cancellation and/or postponement of sporting events had a negative impact on FY2020 earnings results.

Similar to the trend witnessed across the industry in 2020, Bell Wireless service and equipment revenue was down 3.2% and 4.4%, respectively, but with a marked improvement in both revenue lines by Q4 2020. As expected, 2020 postpaid net subscriber additions and blended average billing per user were down YOY, however, postpaid churn also dropped dramatically to 0.99% in 2020 compared with 1.13% in 2019. Bell Wireline revenue was $12.2 billion, down 0.9% YOY as the 1.0% YOY growth in data (Internet and IPTV) was offset primarily by a 4.5% YOY decline in traditional telephony service, which was negatively affected by the Company waiving certain service fees for a period of time on long-distance calling and television channels. As expected, Media revenue declined materially to $2.8 billion, down 14.5% YOY, as customer spending was down across all media channels as well as the impact of cancelled and/or delayed live events.

Consolidated EBITDA margin was 42.0% in 2020 compared with 42.1% in 2019 as the revenue decline was effectively mirrored in the consolidated decline in EBITDA. By operating segment, Bell Wireless EBITDA margin was up slightly, but offset by a decline in Bell Wireline that reflected higher operating costs despite a decrease in commercial activity, and a decline in Media EBITDA margin performance that was largely mitigated by the flow-through effect of lower programming costs associated with the lower revenue base.

BCE/Bell Canada’s financial profile remains supportive of the current rating. Based on DBRS Morningstar-adjusted figures, cash flow from operations was $7.2 billion compared with $7.3 billion (-7.7% YOY), primarily reflecting the 23% YOY decline in net income. Notwithstanding the decline in operating cash flow , the 5.4% YOY increase in capex and 4.3% YOY increase in dividend payments, free cash flow was a use of cash of $71 million in 2020. The gross debt-to-EBITDA was 2.84x times (x) in 2020 compared with 2.70x in 2019. The increase in gross leverage reflected the decline in 2020 EBITDA as gross debt was essentially flat YOY.

As 2021 progresses, DBRS Morningstar expects BCE/Bell Canada’s earnings over the near to medium term to benefit from the economic reopening with the lifting of coronavirus-related restrictions. As consumer and business activity increase through 2021, DBRS Morningstar expects Wireless Service and Equipment revenue growth to improve, particularly in the back half of the year as the Company anniversaries periods in which certain fees were waived and retail store access by consumers was intermittent. The Wireline segment should benefit from the continued rollout of the Company’s FTTH network, which drives Fibe Internet and TV accessibility, and ever-faster data speeds in addition to bundling opportunities with a very competitive wireless offering. Operating performance in the Media business is expected to continue to improve through 2021 as major sports leagues resume their regular seasons. In 2021, DBRS Morningstar expects BCE/Bell Canada’s revenue to increase in the mid-single digits to between $23.5 billion and $24.0 billion and further increase to about $24.5 billion in 2022, reflecting mid- to high-single-digit revenue growth in Wireless, low-single-digit growth in Wireline, and teen double-digit growth in Media. DBRS Morningstar expects the consolidated EBITDA margin to decline modestly YOY, largely reflecting the impact of Wireless loading accelerating and promotion activity moving towards historical norms. As such DBRS Morningstar expects modest margin pressure, and for consolidated EBITDA to increase in the low- to mid-single-digit range, with Wireless up in the mid-single digits, Wireline essentially up in the low-single digits and solid double-digit growth in Media. As a result, DBRS Morningstar expects consolidated EBITDA to increase to between $9.7 billion and $10.0 billion in 2021 and toward $10.2 billion in 2022.

Looking ahead, DBRS Morningstar expects BCE Bell Canada’s financial profile to withstand cash flow pressures primarily related to investment spending over the near to medium term. This view contemplates a higher level of capital investment that reflects base capex plus the recently announced accelerated broadband network program, spectrum license acquisitions over the next several years, steady growth in operating cash flow over DBRS Morningstar’s forecast horizon, and EBITDA growth as the primary driver of balance sheet deleveraging. In 2021, DBRS Morningstar expects capex spending to increase to approximately 19.4% (including spending on the accelerated broadband network program but excluding spectrum license acquisitions) in terms of capital intensity compared with 18.4% in 2020. The result is that the Company will remain close to free cash flow neutral through the forecast horizon, which is similar to historical trends. In terms of liquidity, the Company had approximately $4.0 billion of liquidity available at YE2020. With the completion of the recent $3.0 billion senior notes offering, and subsequent announced redemption of the $1.7 billion 3.00% Series M-40 due October 2022, DBRS Morningstar estimates that the Company has approximately $5.3 billion of liquidity (i.e., cash, multi-year credit facilities, and undrawn accounts receivable securitization). Bell Canada does not have any material debt due until March 2023 ($1,000 million 3.35% Series M-26 debentures). Given the significant capital demands over the next three years (i.e., 2021 to 2023 spectrum auctions and continued 5G rollout) gross leverage, including spectrum licensing spend, is expected to be around 3.0x through 2023 and to begin to taper down in 2024.

DBRS Morningstar believes that BCE/Bell Canada has the scale, financial resources, and market position to manage the current 5G/Fibre capex spending program within its current rating category over the near to medium term. Although unlikely, if BCE/Bell Canada were to achieve a substantial increase in its Wireless and Wireline market share that resulted in a commensurate structural improvement in the Company’s earnings profile, including a supportive regulatory environment, and were to manage leverage sustainably at the low end of the Company’s target range, a positive rating action could occur. Conversely, if, despite the utility-like nature of the industry, BCE/Bell Canada’s operating performance were to sustainably deteriorate and/or leverage were to increase meaningfully for an extended period, a negative rating action could occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Communications Industry (July 30, 2020, https://www.dbrsmorningstar.com/research/364691), Rating Companies in the Broadcasting Industry (March 12, 2021, https://www.dbrsmorningstar.com/research/375262), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020, https://www.dbrsmorningstar.com/research/369167), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021, https://www.dbrsmorningstar.com/research/375001), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021, https://www.dbrsmorningstar.com/research/372344) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020, https://www.dbrsmorningstar.com/research/369165), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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