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.