Chorus BBB debt rating affirmed by S&P, outlook negative on reduced headroom

Chorus's [NZX: CNU] BBB credit rating was affirmed by Standard & Poor's with a negative outlook that reflects prospects for the network company's 'headroom' within financial covenants to shrink as it ramps up spending on the Ultra-Fast Broadband network and regulated prices fall.

The Wellington-based company was placed on creditwatch with negative implications in February, effectively giving it three months to convince S&P not to downgrade its credit rating.

"The rating affirmation reflects our view that Chorus has sufficient flexibility under a range of proposed revenue, cost, and capital management initiatives to temper the impact of reduced network pricing from December 2014 and maintain a financial risk profile consistent with the 'BBB' rating," credit analyst Paul Draffin said in a statement. "The negative outlook reflects the potential for the group’s headroom within bank facility financial covenants to materially diminish over the next few years."

Last year the Commerce Commission proposed cutting the network operator’s pricing on its copper line services, which Chorus said left a $1 billion hole in the funding for the roll out of the government-sponsored UFB.

In March, Crown Fibre Holdings gave Chorus greater flexibility in building the network provided it meets the agreed deadline, and has aligned funding with completed work.

Chorus is working through plans to cut costs and dividend cuts, raise capital, and renegotiate terms of its UFB contract, and has challenged the regulator in the Court of Appeal.

In January, Moody’s Investors Service’s downgraded Chorus to Baa3 from Baa2, the lowest possible investment grade rating.

Draffin said the Commerce Commission's review of its pricing methodology, with an outcome expected in April 2015, may result in more modest price cuts being imposed on Chorus but the ratings company's base case assumes no change and "significant uncertainty remains regarding the outcomes of this process."

"The negative outlook reflects our view that the rating could be lowered in the next six to 12 months due to the potential reduction in forecast covenant headroom during the peak of the UFB construction process; or if management’s strategies to support its financial risk profile are insufficient to maintain debt to Ebitda below 4" times.

Chorus shares fell 0.6 percent to $1.70 and have gained 19 percent this year.

(BusinessDesk