Credit ratings agency Standard & Poor's has revised Telecom's ‘A' long-term rating down to negative outlook.The change followed today's news that the telco is considering a structural separation of its access network, run by its Chorus division,
Credit ratings agency Standard & Poor's has revised Telecom’s ‘A’ long-term rating down to negative outlook.
The change followed today’s news that the telco is considering a structural separation of its access network, run by its Chorus division, from its remaining businesses in order to participate in the New Zealand government's proposed ultra fast broadband (UFB) fibre-to-the-home network.
"We consider [Telecom's] vertically integrated business model to be a key driver of the group's strong business risk profile," Standard & Poor's credit analyst Paul Draffin said. "Accordingly, any separation of the fixed-line access network will have a material negative impact on [Telecom's] business risk profile."
Telecom’s ‘A-1’ short-term corporate credit rating was unchanged.
No immediate refinancing
Forsyth Barr analyst Guy Hallwright told NBR that the short-term impact would be limited: "They don’t have any refinancing to do for the next year or two so no impact in the short term. Longer term it will slightly increase borrowing costs - but only by a fraction of a percent."
Telecom’s CFO Russ Holden said Telecom remained “committed to maintaining single A credit ratings with both Moody's and Standard & Poor's."
S&P said the prospect of structural separation also comes at a time when Telecom continues to face operating and competitive challenges in its core mobile network business.
"Assuming structural separation proceeds, [Telecom's] business risk profile would become increasingly dependant on its mobile business and its large but increasingly competitive fixed line retail business," the agency said. The company's lower credit quality ICT and Australian businesses will become a larger contributor to group earnings.
S&P said a lowering of the long- and short-term ratings on Telecom could occur in the next 12-to-18 months if Telecom agrees to structurally separate it copper access network from the rest of the group; the group's financial profile deteriorates, including fully adjusted debt to ebitda increasing to more than 2x on a sustained basis; or there is a significant shift in earnings mix to lower-quality earnings sources, such as information technology services.
Telecom shares (NZX: TEL) closed today at $1.96, an all-time low.
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