S&P gives Chorus 3 months to stave off downgrade of one or notches

Mark Ratcliffe
Chorus 12-month price history (NZX.com)

Credit rating agency Standard & Poor's says Chorus  [NZX: CNU] must get its debt to below four times operating earnings to stave off a downgrade to its BBB credit rating.

Keeping a BBB rating hinged on whether the company could maintain the terms of its banking covenants, said credit analyst Paul Dufferin in a statement confirming the telecommunications infrastructure provider remains on negative credit watch, where it has sat since Nov. 5.

That was the date the Commerce Commission finalised its decision to cut regulated pricing for unbundled bitstream access (UBA) by 23 percent, threatening both Chorus's ability to fund its role as a lead contractor in the government-backed roll-out of fibre-based ultra-fast broadband, and the economics of UFB products.

UBA services are a key component of existing telecommunications infrastructure, based on ageing copper wire networks, which the UFB fibre network is intended to replace.

"We expect to resolve the CreditWatch within the next three months or so, by which time we expect further clarity on the above-mentioned issues," said Dufferin. "If Chorus can identify and commit to operating and capital management strategies that will allow the group to maintain an adequate level of covenant headroom, together with fully adjusted debt to earnings before interest, tax, depreciation and amortisation before four times, then we will likely affirm the BBB rating.

"However, we expect the outlook to be negative in this scenario, given the expected execution risks associated with these strategies and the rollout of the UFB network," he said.

"If we still consider that these initiatives will not provide adequate flexibility within the group's debt facility covenants, then a lowering of the long-term rating by one or more notches is likely.

The move follows Moody's Investors Service's decision on Jan. 21 to downgrade Chorus to Baa3 from Baa2, the lowest possible investment grade rating.

Chorus is working through plans that could include cost and dividend cuts, capital-raising, and limited renegotiation of the terms of its UFB contract, and has filed a challenge to the Commerce Commission determination in the High Court.

Dufferin said that "if the UBA decision proceeds as proposed, we expect the group's debt to earnings before interest, tax, depreciation and amortisation - assuming Chorus takes no corrective actions - to increase to the mid-five times level over the next three to five years, which is well in excess of financial covenants and tolerances for the BBB rating."

Last year the Commerce Commission proposed cutting the network operator's pricing on its copper line services, which the company says has left a $1 billion hole in the funding to finance roll out of the government-sponsored ultrafast broadband network. Chorus is in negotiations with Crown Fibre Holdings over the building of the network, but Communications Minister Amy Adams has indicated the government expects the company to fill most of the $1 billion hole.

As part of its contract with CFH, Chorus has to maintain an investment grade credit rating if it wants to pay dividends to its shareholders without the Crown entity's approval.

Chorus' stock rose 2.2 percent to $1.38 in afternoon trade, and has dropped 52 percent in the past 52 weeks.

(BusinessDesk)

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1 Comment & Question

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Let it go. The Chorus UFB process is totally broken, from the rollout to the customer install to the technical provisioning of the layer 2 service. CFH would still have to manage the same issues, but at least we wouldn't have to work through umpteen layers of Chorus internal and contractor management to get resolution.

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