Moody’s downgrades Chorus' on regulatory risk

Mark Ratcliffe
Chorus 12-month price history (

Moody’s Investors Service has today issued an announcement downgrading Chorus’ [NZX: CNU] issuer and unsecured credit rating from Baa2 to Baa3, and kept its negative outlook.

Moody’s had previously placed Chorus on review for possible downgrade, following the release of the Commerce Commission’s copper broadband (UBA) pricing decision in November.

As part of its contract with Crown Fibre Holdings, Chorus has to maintain an investment-grade credit rating if it wants to pay dividends to its shareholders without the Crown entity's approval. Baa3 is Moody's lowest investment grade rating, one notch above its speculative Ba1 (although, regardless, most analysts expect Chorus to cancel dividends over the next two years in keeping with the recommendation of the pre-Christmas EY report).

Standard & Poor's put Chorus's BBB rating on CreditWatch negative in November.

Moody's said Chorus faces regulatory risk hanging over its earnings stream from services delivered on the copper network, and higher capital expenditure and operating expenses than originally anticipating, Moody's said in a statement. The negative outlook was due to the uncertainty around whether Chorus can alleviate the regulatory risk.

Chorus chief financial officer Andrew Carroll said the downgrade was disappointing given that the Commission’s pricing decision does not come into effect until December 2014 and the range of initiatives Chorus continues to explore to mitigate the financial impact of the Commission’s final UBA decision.  Moody’s decision will result in an immediate but modest increase in the cost of Chorus’ borrowing.

“As we explained in December, we are assessing all options available to us, including cutting all discretionary activity, re-pricing commercial services, generally managing for cash and assessing capital management options.  We have also commenced constructive discussions with Crown Fibre Holdings. While this work continues, we cannot finalise our medium term strategy or capital management settings.

“In addition, Chorus has appealed the Commission’s initial UBA decision to the High Court and requested that the Commission undertake economic cost modelling of both UBA and UCLL pricing, which differs from its original benchmarking approach, as allowed for by the legislation,” he said.

Chorus is currently rated BBB, creditwatch negative, by Standard & Poor’s.

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So over 1 year out, the ComCom decision is already costing CNU money through extra costs of funds.

Not a good look.

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Maybe its just the fact that Chorus are an old business model, run at board room level, by a group of politicians who should stick to farming.


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Will Chorus need to modify its arrangements with Crown Fibre Holdings if there is another downgrade? Their agreement includes bond requirements for RSPs that do not have investment-grade ratings. Maybe those RSPs could request a bond from Chorus in return?

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National needs to find a way to get more support in Parliament to help CNU out.

Now what could John Key do to gain an extra vote or two?

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S&P & Moody's. The same incompetent organisations that helped bring the world to it's knees in the Global Financial Crisis in 2008 when they rated Freddie Mac, Fanny Mae, American International Group, Lehmans et al with AAA+ credit ratings while the whole time they were all up to their ears in extremely dodgy high risk sub prime mortgage credit default swaps. It's incredible the banks care at all about their so-called ratings when they should be doing their own research into the investment worthiness of a business.

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Com Com have ensured that no overseas investor with a brain will invest in the NZX in future. Investors don't like the uncertainly of a regulator who plays ducks and drakes with companies profitability and is easily swayed by self interested pressure groups into making bad decisions as regards long term infrastructure investment.
Unless NZ wants to continue to be an IT back water the government are going to have to clip the wings of the Com Com.

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