DBRS has announced:
has today placed its ratings of Bell Canada Under Review with Positive Implications and maintained its ratings of BCE Inc. (BCE or the Company) Under Review with Developing Implications. Additionally, DBRS has withdrawn its ratings of BCE Acquisition Inc.
DBRS’s review will focus on a re-evaluation of the credit profiles of BCE and Bell Canada. This will include the current business and financial risk profile of Bell Canada and any expected changes to these factors in the near to medium term now that the privatization of its parent, BCE, is not proceeding. This review will include DBRS’s view of the potential for further events over the near term.
In addition to the above, BCE announced that the BCE board will immediately following the termination of its Definitive Agreement address (1) a reinstatement of its common dividend (beginning with declaring its Q4 2008 dividend payable January 15, 2009) and (2) a return of capital to its shareholders through a normal course issuer bid (NCIB). DBRS was largely anticipating the reinstatement of its common dividend, although it is difficult to qualify the magnitude of its NCIB at this stage.
Should there be no significant changes in strategy, business mix or Bell Canada’s capital structure, DBRS believe its ratings could be moved to the A (low) to “A” range given its businesses that generate strong EBITDA margins (at or above 40%) and reasonable leverage with gross debt-to-EBITDA at 2.0 times or below. Concurrently, DBRS plans to remove its recovery ratings on Bell Canada, which will no longer apply. The long-term debt rating of Bell Canada is expected to serve as a reference for BCE’s long-term rating, which could be either one notch lower than Bell Canada’s due to structural subordination or possibly the same.
The NCIB was quantified somewhat in the BCE press release:
BCE will return capital to shareholders in the form of a Normal Course Issuer Bid (NCIB). To that end, BCE will repurchase up to approximately 5% of outstanding common shares, or about 40 million common shares. The NCIB is subject to approval by the Toronto Stock Exchange (TSX) and will be carried out in accordance with the requirements of the TSX and applicable laws.
“A share buyback is the most efficient method of distributing capital to our shareholders, particularly given the current valuation metrics of the Company,” said Siim Vanaselja, Chief Financial Officer of BCE. “The share buyback will be accretive to earnings per share and cash flow. Our improving operational progress provides the Company with confidence in our ability to return value to shareholders now and into the future.”
I noted in the post regarding the death of the deal:
I’m afraid that in the absence of strong, credible statements from BCE regarding their capital structure going forward, BCE prefs remain rather more speculative than I like.
So I share DBRS’ caution! I will say, however, that the absence of dramatic moves by the board to support the stock price – a massive dividend, a massive buy-back – gives comforat and I now consider it more likely than not that BCE will retain its Pfd-2(low) rating.