Fitch Downgrades BCE and Bell Canada to 'BBB+'.

CHICAGO -- Fitch Ratings has downgraded the following long-term debt ratings of BCE Inc. (BCE) and Bell Canada. The Rating Outlook is Stable.

BCE

--Senior unsecured debt to 'BBB+' from 'A-';

--Issuer default rating (IDR) to 'BBB+' from 'A'.

Bell Canada

--Senior unsecured debt to 'BBB+' from 'A';

--IDR to 'BBB+' from 'A';

--Subordinate debt to 'BBB' from 'A-'.

The ratings downgrade of BCE and Bell Canada reflects the lack of significant financial leverage improvement from the planned asset sales and execution risk surrounding the company's strategic restructuring in an increasing competitive environment, which is causing higher levels of risk as erosion occurs to Bell Canada's legacy voice products for local access and long distance services. Expectations are for access line erosion to accelerate over the next couple of years due to cable operators voice-over-Internet protocol (VoIP) offerings and wireless substitution. Fitch had previously indicated that further debt reduction was necessary to mitigate the increasing business risk. While BCE is planning on reducing debt that is maturing over the next two years by $1 billion, the company's financial metrics do not improve significantly, and BCE is planning to return substantial value to its shareholders. In the future, Fitch believes that any further asset sales will likely provide greater benefit to shareholders.

Bell Canada is attempting to mitigate the effects of revenue mix changes and margin pressures with a cost restructuring program that aims to reduce operating expenses by $700 million to $900 million in 2006 and $600 million to $800 million in 2007. The expectations for 2006 appear to be reasonable given the progress reported by management. Fitch expects Bell Canada's diversified operations in growth areas including wireless, digital subscriber lines (DSL), video and business ICT solutions to provide an offset to the legacy revenue erosion, although uncertainty exists whether Bell Canada can maintain margins through these mix changes and cost pressures particularly if competitive threats are greater than expected.

Additionally, Bell Canada has significantly less exposure to wireless compared to its peers, as Fitch believes wireless is an increasingly important and growing offset to the fixed-line losses as more access minutes migrate from the wired network to wireless. While Bell Mobility's wireless operating margins are solid, the trends in operating performance have lagged its peer group over the last several quarters.

The ratings of BCE and Bell Canada have been converged given the increasing consolidated nature of the two companies. With BCE's planned divestiture of non-strategic assets, Bell Canada will generate substantially all of BCE's cash flow to meet debt service obligations. Bell Canada's ratings are supported by its dominant market position, stable regulatory climate, sizable cash generation and scale.

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. Last 12 months (LTM) free cash flow (FCF) at BCE was approximately $650 million. Free cash flow to total adjusted debt is relatively low at approximately 4%. Given the pressure on Bell Canada's wireline segment and efforts to improve the company's cost structure, it is uncertain as to the level of FCF improvement that can occur over the next 12-18 months. Provided that access line erosion does not increase beyond expectations, Fitch expects relatively stable financial metrics going forward. As of Dec. 31, 2005, total adjusted debt to operating EBITDAR for BCE was approximately 2.3 times. BCE also has $1.4 billion of debt maturing over the next year.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the ratings process other than through the medium of its public disclosure.