TORONTO – Saying it expected Bell Canada Enterprises to dump – or to have already dumped – non-core assets, Moody’s Investors Service today changed the outlook of the long-term ratings assigned to both BCE and its Bell Canada division to negative from stable.
“This action is prompted by Moody’s belief that a number of key financial metrics may not improve sufficiently by the end of 2006 to support the current ratings. Moody’s now believes that management may either not sell non-strategic assets to the extent previously expected, or a meaningful portion of asset sale proceeds, should they be realized, may be directed to shareholders, such that debt may not be reduced to levels necessary to maintain the current long-term ratings,” said Moody’s release.
Moody’s had previously expected that BCE would sell a meaningful portion of its non-strategic assets and use the proceeds to reduce debt. However, given developments in the last few months, this view has changed. Management have stated that they’re coming close to achieving their own capital structure targets, they raised the dividend 10%, and most recently they’ve expressed interest in retaining effective control of the content at Bell Globemedia, their primary "non-strategic" asset, said Moody’s
It is also possible that shareholder demands might cause management to direct a meaningful amount of any asset sale proceeds to them rather than to debt reduction for the benefit of creditors.
The ratings could be reduced if Moody’s believes BCE is unlikely to achieve a relationship of consolidated free cash flow to net debt of at least 10% within a two year rating horizon, most likely caused by 1) operational underperformance, or a decision to either 2) not sell non-strategic assets or 3) use meaningful asset sale proceeds for the benefit of shareholders rather than creditors. At 10%, this degree of leverage does not, in itself, reflect an A3 company, but it is offset by BCE/Bell’s qualitative strengths, the potential for improved cash flow beyond 2006 as the result of repositioning expenditures now being incurred, the strength in other financial metrics that ignore capital intensity and dividends, and the potential for management to reduce capital intensity, the last of which could significantly affect cash flow, given the size of BCE’s top line.
The ratings might be raised, which Moody’s does not currently expect, if BCE/Bell were to sell meaningful assets, use the proceeds to reduce debt, and outperform Moody’s current operational expectations, causing Moody’s to conclude that free cash flow to net debt might approach 15-20% within a two year rating horizon, continues the release.
In 2004, BCE’s consolidated free cash flow (cash from operations less capital expenditures and dividends, reduced by $95 million for an increase in securitization outstandings, and reduced by the $75 million fee from Manitoba Telephone Services) was $600 million, approximately 4% of nearly $14 billion in consolidated net debt (including $1.1 billion of securitization outstandings). Moody’s believes free cash flow could approximate $1 billion in 2006, or 8% of about $12 billion in expected consolidated net debt by the end of that year, absent asset sale proceeds.
