Telecom's credit rating has been cut by Fitch and it could be cut further depending on what happens with the government's ultra-fast broadband initiative.The credit rating company cut Telecom to an A minus rating from an A and said the outlook on the rati
Telecom's credit rating has been cut by Fitch and it could be cut further depending on what happens with the government's ultra-fast broadband initiative.
The credit rating company cut Telecom to an A minus rating from an A and said the outlook on the rating was negative.
Telecom yesterday cut its earnings guidance for the 2011 to 2013 years and said it was axing 200 management jobs this year.
Fitch said the downgrade followed yesterday's downward revision of earnings.
"A further downgrade could be triggered by any regulatory determinations that materially weaken cash generation, including the possible structural separation of the group's assets," Fitch said.
Conversely, regulatory certainty in respect of structural separation and clarification of the government's broadband initiatives, would be triggers for a revision of the outlook to stable.
The government's proposed fibre-to-the-premise investment programme, ultra-fast broadband (UFB), posed a significant threat for Telecom, Fitch said.
There has been speculation that Telecom may have to split into two to participate in UFB. Chief executive Paul Reynolds said yesterday that the company was open to working with the Government on a "full range of approaches,"
Fitch said the government's plan was premised on avoiding a vertically integrated company, effectively forcing competition between UFB and Telecom's $1.3 billion national fibre network.
There was a risk that Telecom could have to undertake a voluntary structural separation in order to participate.
The New Zealand government expects to enter into final binding offers for recommendation during the third quarter of 2010, which should help clarify the regulatory landscape.
Fitch said today's downgrade was a consequence of a declining revenue outlook for the company's mobile, voice and data business segments.
Also Telecom's capital expenditure plans exceeded Fitch's previous expectations.
Fitch said a net debt to funds from operations measure it used to assess the company's leverage was above 2 times in the 2010 financial year.
Fitch said it had earlier that a downgrade could be triggered by this leverage measure being sustained above 2 times.
Fitch acknowledged that Telecom has a strong domestic market position, solid cash generation and domestic earnings margins, and a publicly articulated conservative financial profile.
But it also cited challenges from growing competition, largely driven by regulatory change, a heightened risk of structural separation and a competing government-funded fibre-optic infrastructure.
Other factors potentially leading to a downgrade include leverage being sustained above 2.5 times, or a material contraction in earnings before interest, tax, depreciation and amortisation margins.
