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 are supported by steady operating income growth and stable financial metrics. 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 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. The action taken today and outlook for the Company also incorporate the current uncertainty related to Coronavirus Disease (COVID-19).
BCE/Bell Canada’s earnings profile continued to be well positioned in the current rating during 2019. The Company delivered steady operating growth driven by the Wireless segment despite headwinds in its legacy Wireline services. Revenues for 2019 increased 2.1% year over year (YOY) to $24.0 billion, driven by growth across all three operating segments. Adjusted EBITDA margin increased to 42.2% in 2019 from 40.6% YOY, primarily reflecting service revenue growth and the impact of IFRS 16. As a result, adjusted EBITDA increased 6.0% YOY in 2019 to $10.1 billion.
BCE/Bell Canada’s financial profile remained stable on a YOY basis as it continued to finance its capital program and dividends through internally generated cash flow, which increased materially YOY in 2019 and provides considerable financial flexibility going forward. Total balance sheet debt on a reported basis (i.e., reflecting the impact of IFRS 16) at year-end 2019 was $26.3 billion, and the Company had $145 million in cash. As a result of the Company’s strong operating results, 2019 gross financial leverage was 2.70 times (x), compared with 2.77x in 2018 on a non-IFRS 16 basis (i.e., operating leases capitalized at 6.0x).
While DBRS Morningstar expects Bell Canada’s earnings profile to remain stable over the medium and longer term, short-term performance is likely to be negatively affected by the coronavirus crisis. Having said that, the utility-like nature of the wireless and wireline services provided by Bell Canada and the critical role the communications industry plays during times of adversity positions the Company defensively through the current period. Although DBRS Morningstar's outlook will remain fluid as the coronavirus crisis unfolds, 2020 revenue is expected to be $23.5 billion to $24.0 billion, which reflects a normal first quarter, a weak second quarter, and recovery in the second half of the year. Adjusted EBITDA margin is expected to range between 41.0% and 42.0% in 2020, resulting in adjusted EBITDA of $9.5 billion to $10.0 billion in 2020 and then recover materially in 2021 through 2023.
DBRS Morningstar expects BCE/Bell Canada’s financial profile to remain stable over the near-to-medium term despite the impact of the coronavirus crisis. While operating cash flow may come under pressure in 2020, the Company has no maturities until May 2021. Looking ahead to 2021 through 2023, DBRS Morningstar expects the financial profile to be supported by steady growth in operating cash flow and prudent capital management such that the Company is able to maintain gross debt-to-EBITDA below 3.0x (excluding spectrum license auction activity), a level which DBRS Morningstar believes is sufficient for the current rating.
A negative rating action may result should the operating environment deteriorate well beyond current expectations related to coronavirus and/or other industry factors, if management becomes more aggressive such that gross debt-to-EBITDA increases materially above 3.0x for a sustained period, or capital is not adequately preserved in order to ensure sufficient operating liquidity. Conversely, DBRS Morningstar believes a positive rating action is highly unlikely in the current environment because of the uncertainty surrounding the coronavirus crisis, competitive landscape, high level of capital intensity, and material distribution to shareholders.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Communications Industry, Rating Companies in the Broadcasting Industry, DBRS Morningstar Criteria: Guarantees and Other Forms of Support, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers, 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.
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