Fitch Assigns 'A' Rating to Bell Canada Debt

Business Wire, Sept 16, 2005

CHICAGO -- Fitch Ratings has assigned an 'A' rating to Bell Canada's C$200 million offering of medium-term note debentures due 2016. The net proceeds of this issue will be used for general corporate purposes, including the repayment of short-term debt. Bell Canada's parent, Bell Canada Enterprises Inc. (BCE), has an 'A-' unsecured debt rating. The Rating Outlook for Bell Canada and BCE is Stable.

The ratings for BCE and Bell Canada reflect Bell Canada's dominant market position, supported by a stable regulatory climate, sizable cash generation, considerable nonstrategic assets, and growth in Bell Canada's consumer segment, balanced against the competitive pressures in the local, data, and long-distance segments as well as regulatory rulings, which have pressured margins. While Fitch believes voice-over-Internet protocol (VoIP) offerings will increase business risk and accelerate access-line erosion in 2006, that effect can be potentially offset by diversified operations in growth areas, such as wireless, digital subscriber lines (DSL), and video, as well as productivity improvements to maintain free cash flow levels. Bell Canada's ability to drive new revenue growth will ultimately determine the sustainable long-term credit profile. In addition, noncore asset divestitures could play a role in improving the overall credit profile of Bell Canada and BCE while sharpening the focus on their core operations.

Fitch believes that further debt reduction is necessary to offset the increasing business risk associated with its wireline segment, and Bell Canada has options for further deleveraging. Additional debt reduction could be accomplished through expected free cash flow and possible asset divestitures. BCE management has indicated that asset sales could potentially occur in the upcoming months. In light of the existing competitive pressures and future threats to its wireline revenues, Bell Canada's longer term strategic initiatives are critical to sustain its free cash flow prospects.

While the Canadian incumbent operators have not been immune to regulatory decisions to stimulate competition, the Canadian regulatory environment is supportive of facilities-based carriers and is not as onerous as that in the U.S. Likewise, the competitive environment, while challenging, does not present near the level of risk (particularly from the wireless segment, a key growth engine) facing U.S. operators, as Bell Canada maintains a strong position as the incumbent operator in Ontario and Quebec. However, Bell Canada has significantly less exposure to wireless compared with that of its peers, as Fitch believes wireless is an increasingly important and growing offset to the fixed-line losses caused by competitive pricing, VoIP substitution, and wireless substitution. Bell Canada derives 18% of its revenues from wireless compared with an average of approximately 40% for a U.S. ILEC and TELUS Corp.

BCE's liquidity is solid owing to the company's free cash flow, manageable maturity schedule, cash on hand, accounts receivable securitization program, and available bank lines. BCE has approximately C$1.5 billion of debt maturing over the next year with C$1.0 billion due in 2006. Last 12 months (LTM) free cash flow at BCE was approximately C$800 million. Total debt to operating EBITDA for Bell Canada was 1.6 times. For the first six months of 2005, debt increased by approximately C$900 million, primarily due to increases in capital lease obligations and small acquisitions.

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