BCE's Costs Increase as CTV Purchase Boosts Borrowing Costs: Canada Credit

BCE Inc.’s plan to buy Canada’s largest television broadcaster for C$1.3 billion ($1.27 billion) is driving its borrowing costs higher and contributing to the worst month for the nation’s corporate bond market this year.

Bell Canada’s 5 percent bonds due in February 2017 yielded 137 basis points more than government benchmarks today, up from 134 on Sept. 9, the day before the purchase for Toronto-based CTV was announced, according to Bloomberg data. The relative yield on the broad Bank of America Merrill Lynch Canadian Corporate Index held steady at 148 basis points during that period. Bell Canada’s parent, Montreal-based BCE, is Canada’s largest phone company.

BCE Chief Executive Officer George Cope is betting that CTV’s specialty and sports channels will help lure subscribers to the company’s Bell-branded digital TV and wireless networks as regulations that govern who can provide wireless phone service in Canada are loosened. Bonds of BCE rivals Rogers Communications Inc. and Shaw Communications Inc. are among the 10 worst performing of Canada’s top 50 issuers this month.

Wider spreads on BCE debt “reflect the slight increase in leverage and also reflect investor anticipation of a new issue from Bell in the coming months,” Jonathan Allen, head of Canadian credit research at Royal Bank of Canada’s RBC Capital unit in Toronto, said via e-mail. He called the spread widening “reasonable.” RBC maintains its “outperform” rating on Bell Canada debt.

AbitibiBowater Notes

The spread on Bell Canada 5 percent bonds due in 2017 was as wide as 159 basis points in June.

“I think it’s been quite positively accepted,” Siim Vanaselja, BCE’s Montreal-based chief financial officer, said in a telephone interview, referring to the CTV deal. “Initially our bond spreads widened at the moment that we announced the transaction, but they’ve subsequently traded back to preannouncement levels and I think that’s as information pertaining to the transaction became more fully digested.”

Elsewhere in credit markets, the extra yield investors demand to own the debt of Canada’s provinces rather than its federal government remained at 56 basis points, according to a Bank of America Merrill Lynch index. Spreads have widened from 74 basis points in May. Yields fell to 3.392 percent.

Provincial bonds, with about C$461 billion outstanding, have made investors 6.5 percent this year, compared with 6.1 percent for governments.

Corporate bonds have lost investors 0.7 percent this month, the most since the 1 percent decline in December, the Merrill data show. They have returned 6.2 percent so far this year. The Global Broad Market Corporate Index is down 0.8 percent his month, the most since February 2009.

AbitibiBowater Inc., the largest newsprint maker in North America, plans to sell $750 million of senior secured notes due 2018, the company said in a statement. The offering is part of the Montreal-based company’s plan to emerge from creditor protection in the U.S. and Canada.

Note Auction

Canada sold C$3 billion of 1.5 percent bonds due in December 2012 today, fetching an average yield of 1.556 percent. The bid to cover ratio was 2.63 times. The previous two-year auction on Aug. 11 drew an average yield of 1.52 percent and a bid-to-cover ratio of 2.5.

Canada’s benchmark two-year bond rose three basis points to 1.5 percent. The spread between the Canadian two-year bond and the equivalent-maturity U.S. security widened to 102 basis points, the most since July, on speculation the Bank of Canada will raise interest rates faster than the Federal Reserve.

Canada’s government bond market has underperformed Treasuries, losing 0.86 percent this month, compared with 0.8 percent for U.S. debt, according to Bank of America Merrill Lynch index data.

Royal Bank of Canada’s long-term debt ratings may be downgraded by Moody’s Investors Service because of the bank’s reliance on capital markets, the ratings company said yesterday in a statement. Moody’s will focus its review on Royal Bank’s commitment to capital markets and its growth plans for the business. Toronto-based Royal Bank is rated Aaa for long-term deposits and senior debt, the highest level at Moody’s.

Debt to Earnings

BCE’s ratio of debt to earnings before interest, tax, depreciation and amortization will rise to 2 times, from 1.8 times before the purchase, RBC Capital wrote in a Sept. 13 note to clients. RBC said BCE may issue as much as C$1 billion in debt to help fund the deal before it closes -- anticipated by mid-2011 -- and another C$1.4 billion afterwards to refinance CTV debt. BCE intends to fund the transaction with C$2 billion in bank debt, newly issued shares and cash on hand, the company said in a statement last week.

Bell Canada 6.1 percent bonds due in March 2035, with C$450 million outstanding, have lost 2.2 percent so far in September, according to the Merrill data. Bell Canada has four of the 25 worst performing bonds this month among the 700 bonds on the broader index, which tracks about C$277 billion in debt.

The bonds of Rogers Communications, Canada’s largest wireless provider and BCE’s Toronto-based rival, have lost investors 1.3 percent this month, while Shaw Communications’ debt is down 1.2 percent, according to the Merrill data as of Sept. 13. Calgary-based cable provider Shaw bought Canwest Global Communications’ television assets this year.

Broadcast Network

BCE, the target of a failed C$52 billion buyout two years ago, agreed to buy the shares of CTV it doesn’t already own for C$1.3 billion. CTV has more than 5,000 employees and operates 27 television stations across the country, 30 specialty channels including the sports channel TSN and 34 radio stations across Canada.

BCE is paying investors including the Thomson family’s Woodbridge Co. cash and stock for 85 percent of CTV, the company said. BCE will also assume C$1.7 billion in debt.

Standard & Poor’s affirmed its BBB+ rating on BCE after the announcement of the deal, the ratings agency said in a Sept. 10 statement.

“We are affirming our ratings on BCE and its 100 percent- owned subsidiary Bell Canada, including our BBB+ long-term corporate credit rating on both companies, given that the transaction does not materially affect BCE’s overall business risk profile and that pro forma credit metrics should remain appropriate for the ratings,” S&P said in the statement.

To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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