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Brent Lewin/Bloomberg

DBRS Ltd. has downgraded its ratings on Bell Canada and parent company BCE Inc., betting that the Canadian communications giant's deal to acquire Manitoba Telecom Services Inc. is likely to go through.

The ratings firm published a report on Tuesday explaining the changes, one day after BCE's announcement that it plans to purchase the remaining interest it does not already own in data centre operator Q9 Networks Inc., a deal worth $675-million in debt and cash.

That news followed plans revealed in early May to buy MTS for $3.1-billion plus the assumption of $800-million in debt. It still requires government and regulatory approvals and is not expected to close until the end of the year or early 2017.

At the time, DBRS said it was placing the company under review, warning that it would take longer than expected for BCE to get its ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) back within its target range.

"The rating downgrades reflect DBRS's view that the MTS transaction will likely be completed as previously contemplated and follow BCE's announcement that it will acquire complete control of Toronto-based data centre operator, Q9 Networks Inc.," the ratings firm said on Tuesday.

"Successive, largely debt-financed acquisitions in recent years have caused the company's financial leverage to remain above its stated target … and have repeatedly delayed the company's deleveraging plans."

DBRS cut its rating on Bell Canada's debt to BBB (high), down from A (low), and reduced its rating on BCE to BBB, down from BBB (high). The company's debt remains investment grade, according to the agency.

Some of the transactions BCE has completed include the privatization of Bell Aliant Inc. in 2014, a deal worth close to $4-billion, and the purchase of Astral Media Inc. for $3.2-billion in 2013.

As of June 30, the company's debt leverage stood at 2.50 times net debt to EBITDA. (The company's target range is between 1.75 times and 2.25 times.)

DBRS warned in its report that BCE's high capital investments (as it upgrades its networks to fibre-optic technology) and dividend payments could limit the company's ability to reduce its debt leverage quickly. The agency also highlighted concern over increasing competition in the wireless market and structural declines in the media business as customers cut back on television subscriptions.

Nonetheless, DBRS emphasized that it considers Bell Canada to be in the high end of the BBB rating category. "DBRS views the company as a best-in-class telecommunications operator, exemplified by a track record of consistent EBITDA growth, industry-leading wireless average revenue per user and post-paid subscriber growth as well as sound wireline performance."

The move by DBRS was not surprising, Bank of Montreal corporate debt analyst Joanne Chen said in a note to clients Tuesday. "In our view, the imminent downgrade of Bell's rating was well telegraphed by DBRS in the rating agency's last press release dated May 2 [after the MTS deal was announced]," she said.

Ms. Chen also noted that the change by DBRS brings it into the same range as that of fellow ratings firms Standard & Poor's and Moody's.

BCE spokesman Mark Langton echoed that sentiment on Tuesday, stating, "It's not an unexpected change considering earlier DBRS communications and they're now aligned with Moody's and S&P."

Ratings agencies have raised concerns over the past year or so regarding the debt leverage of Canadian telecom companies.

Although the cost of borrowing has been low, the agencies have highlighted the fact that telecom operators have made expensive – albeit necessary – investments in wireless spectrum licences and technology upgrades while at the same time committing to return capital to shareholders.

By the end of the second quarter, the debt leverage ratios of BCE's national wireless peers Rogers Communications Inc. and Telus Corp. were both higher than BCE's. Telus's net debt stood at 2.67 times EBITDA, while Rogers' was 3.1 times.

Despite the ratings downgrade, BCE announced late Tuesday that it plans to offer a total of $1.5-billion in new debt.

"With this transaction, we are pleased to have secured significant debt capital at what is the all-time lowest financing rate ever achieved by Bell Canada on any [medium-term note] debenture issuance," the company's chief financial officer Glen LeBlanc said in a statement.

The company said it will use the funds to help pay for the Q9 purchase, to retire an earlier series of debt that will come due in February and for general corporate purposes.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:54pm EDT.

SymbolName% changeLast
BCE-N
BCE Inc
-0.82%33.98
BCE-T
BCE Inc
-1.01%46.03
BMO-N
Bank of Montreal
+1.35%97.68
BMO-T
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CE-N
Celanese Corp
+1.31%171.86
E-N
Eni S.P.A. ADR
+0.79%31.72
E-T
Enterprise Group Inc
-1.16%0.85
RCI-N
Rogers Communication
-0.49%41
T-N
AT&T Inc
+0.28%17.6
T-T
Telus Corp
+0.37%21.67
TU-N
Telus Corp
+0.63%16.01

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