Standard & Poor’s Downgrades Bell Canada Bonds

Bond watchers knew this day was coming: Standard & Poor’s downgraded BCE Inc. (BCE) and Bell Canada bonds into junk territory on Monday.

The rating agency lowered BCE and Bell’s long-term corporate credit rating to “BB-” from “A-,” an investment grade rating, in order to reflect the pile of debt the company is on the verge of absorbing.

The proposed C$52-billion privatization plan is being led by Ontario Teachers’ Pension, and the company has said it plans to borrow C$34.4-billion to finance the deal. The proposed transaction has already caused some of Bell’s bonds to slide more than 20% since rumors of the takeover first emerged in late March.

Another credit rating agency had already lowered its rating on Bell.

S&P also lowered its rating on about $4.9-billion of Bell Canada senior unsecured debentures outstanding to “BB+” from “A-.” Further, S&P lowered its rating on Bell Canada’s subordinated debt to “B” from “BBB+.”

“The multi-notch downgrade reflects our view that BCE no longer possesses an investment-grade financial policy given the high degree of certainty that the LBO will be finalized shortly,” S&P said in a statement. Madhav Hari, S&P’s lead analyst in the telecom sector, made the downgrades.

“It would be fair to say...this is an interim step that reflects the best possible outcome scenario knowing what we know today,” he said. “We will be reviewing this transaction in greater detail” as the closing date on the deal approaches. In other words, further downgrades could be on the way.

The ratings on the senior unsecured debt of BCE ($650-million), Bell Canada ($2-billion) and Bell Mobility Cellular Inc. ($150-million) remain unchanged because those bonds are expected to be redeemed as part of the privatization deal.

The ratings on BCE’s C$2.77-billion preferred shares will also remain untouched because they, too, are expected to be redeemed.

Some of Bell’s bondholders who have been hurt by the takeover announcement have banded together and are going to court to protect their investment.

The group charges that Bell's 1976 and 1996 bonds contain a clause that says any reorganization or reconstruction of the company must be approved by the trustee for the bondholders. Bell argues the terms of the Teachers takeover transaction complies with the bonds’ trust indentures.

Shareholders approved the deal last week. Teachers’ and Bell still need regulatory approval in Canada and the United States.