Chorus debt rating could be cut after draft price controls

Chorus's Baa2 credit rating may be cut by Moody's Investors Service after the Commerce Commission released a draft plan to curb prices the company can charge retailers to access its network.

The review affects $US2 billion of debt. The regulator yesterday released a draft determination that would cut the price of the Chorus basic service relating to the unbundled local copper loop (UCLL) component of its unbundled bitstream access (UBA) to $8.93 per line a month from December 2014 from $21.46.

Chorus has said this will slash as much as 40%, or $160 million a year, from pre-tax earnings and changes to wholesale pricing for UCLL would have a $20 million earnings impact.

If implemented as proposed, the pricing cut is "likely to have a material impact on Chorus's credit profile and be inconsistent with a Baa2 profile", says Maurice O'Connell, a Moody's analyst.

It would "exacerbate Chorus's negative free cashflow position and lead to materially elevated leverage, putting significant pressure on the company's key financial metrics".

The Baa2 rating is the second-lowest investment grade level issued by Moody's Investors Service. If the Chorus credit rating falls below investment grade while debt is still owed to Crown Fibre Holdings for the government-sponsored fibre network build, the network company is banned from paying dividends without CFH's approval.

Shares of Chorus tumbled 14% to $2.91 after the commission's announcement yesterday, 3 cents lower than its listing price last year.

The draft determination is not a done deal yet. Prime Minister John Key described the move as "very problematic" and Communications Minister Amy Adams has referred it to her officials to assess the pricing impact, saying a pricing methodology appropriate to New Zealand had to be found.

Among Chorus's concerns is the potential for much lower copper network pricing to deter investment and uptake of ultra-fast broadband, using the government-subsidised fibre network being laid throughout the country.

Chorus was spun-out from Telecom as a separately-listed company last year to free up the telecommunications company from its regulatory burden and allow the network operator to successfully win a billion-dollar subsidy to build a nationwide fibre network and rural broadband system.

Some 80% of the network company's revenue is still derived from the ageing copper network, and is subject to the Commerce Commission's pricing review.

At a media briefing in Wellington, Telecommunications Commissioner Stephen Gale today stressed the UBA pricing regime was a draft decision and would go out to industry for consultation with a view to making a final ruling in June.

The UCLL service lets telecommunication companies use the copper network between an exchange and an end-user's premises to offer their own voice and broadband services.

UBA gives access to Chorus's electronics, software and transport over the network, meaning telcos do not have to build their own.

(BusinessDesk)

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3 Comments & Questions

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The Commerce Commissioner needs to be told the business and economic facts of life. Obviously a pointy head with no understanding of business. CC will have effectively cut the 2007 price by 24% when the new price comes into effect in Dec 2014. If the copper price is close to UFB no one's going to switch. Why would they? So the government's plans for UFB are sabotaged by a government department run by morons who don't get business basics.

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Don't be too hard on him - he's only doing what the government told him to do in the latest revamp of the Telecommunications Act. The morons who don't know what is going on are the politicians and policy wonks who devised this revision. The politicians say they want fast fibre uptake but gave him an Act that requires him to make copper more competitive - and hence delay the uptake of fibre.

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Most people in NZ won't even have the option of fibre for the first five or six years of the project, and 25% will never have that choice. Why should they pay more to support the government's UFB pipe dream?

If you ask me, the ComCom is on the money and it is the ministry responsible for UFB that are "run by morons".

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