Standard & Poor's downgrades structural separated Telecom NZ

Stuart Corner
Monday, 14 November 2011 11:38

IT Industry - Listed Tech

Standard & Poor's has downgraded Telecom NZ's credit rating by one notch, following the structural separation of Telecom NZ's fixed access network business into a separate entity, Chorus, which cleared is final hurdle last week.

In anticipation of the demerger, which will be consummated on 30 November, flagged the possibility of such a downgrade back in August. It has lowered Telecom NZ's rating from A/A-1 to A-/A-2, with outlook 'stable' and has removed all the company's rating from CreditWatch, where they were placed with negative implications on 4 August 2010.

S&P's does not envisage lifting the rating again any time soon, saying: "Upward rating pressure is considered unlikely in the next few years, given the increasing competition and TCNZ's already modest financial risk profile."

S&P said: "The downgrade reflects TCNZ's reduced revenue diversity and loss of high-credit-quality access network revenues due to the demerger of Chorus Ltd (BBB/Stable/A-2). Tempering the loss of these network revenues is TCNZ's adoption of a more conservative financial policy framework."

It added: "In our view, the high-quality access network revenues and integrated business model were key credit strengths of TCNZ, with the access network accounting for about one-third of the group's pre-demerger earnings. Accordingly, as a consequence of the demerger, we have lowered our assessment of TCNZ's business risk profile to 'satisfactory', from 'strong'.

"The 'A-/A-2' ratings on TCNZ reflect our opinion of the group's modest financial risk profile, significant market position as the largest provider of telecommunications products and services in New Zealand, and strong free cash'¦In our view, TCNZ's existing market position and the quality of TCNZ's 3G network should allow the company to maintain and modestly grow its revenue share of the mobile market in New Zealand. We note, however, that new competition in the mobile market, primarily from 2Degrees, is creating significant price competition that is likely to constrain any meaningful near-term revenue and margin growth."