Moody's downgrades Telecom on Crown fibre news

Investors may be cheering Telecom's Crown fibre win, driving the company's shares to a 15-month high. But one ratings agency is less impressed.

Moody's has lowered its outlook on Telecom's  A3 senior unsecured long-term rating and P-2 short term rating to negative from stable. Around $2.3 billion in debt is covered by the rating.

The rating agency said the change was prompted by Telecom's announcement that it will structurally separate its access business - Chorus - and that Chorus has been selected to take a cornerstone role in the government's ultra-fast broadband (UFB) initiative.

Following structural separation, which is subject to shareholder approval and legislative change, Telecom will be a retail-orientated telecommunications business comprising predominantly fixed, mobile and ICT businesses, Moody's noted.

Narrowing mix
"The change in outlook to negative reflects the earnings dilution and narrowing of business mix that will arise from the proposed separation of Chorus and therefore the loss Telecom's legacy copper network, said  Ian Lewis, a Moody's Senior Credit Officer.

"At the same time, the negative outlook reflects the uncertainty associated with Telecom's capital structure and financial policy post-separation," Mr  Lewis added.

The negative outlook also considers the possible lapse of considerable amount of time before the separation is effected, Moody's said. Yesterday, Telecom chief executive said the necessary shareholder vote might not happen until the end of the year.

In March, Standard & Poor's reiterated its decision to put Telecom on credit watch negative (which remains its status today) citing Crown fibre uncertainty.

Telecom shares rises further
Investors seemed unfazed. Telecom shares (NZX: TEL), which yesterday rose 6.8% or 15.5 cents, were up another 3.2% to $2.52 in midday trading.

Yesterday afternoon, Forsyth Barr downgraded the company to hold, based on value. Analyst Guy Hallwright said he was also waiting for more detail to appear about Telecom's UFB contracts, and the exact shape of its structural separation. Information provided by Telecom and the government yesterday was "sparse", Mr Hallwright said.

Deutsche Bank's Geoff Zame upped his 12-month price target on Telecom from $2.10 to $2.49 (that is, below its price today) but called the decision "a win on points for the Crown".