Moody's downgrades Telstra

Stuart Corner
Thursday, 08 December 2005 08:37

IT Industry - Strategy

Moody's Investors Service has downgraded Telstra's senior unsecured rating to A2 from A1 because of tis uncertain operating environment and the risks associated with replacement of its key network and IT components.

The outlook is negative "[reflecting] the possibility that Telstra's business transformation plan entails significant execution risk, heightened by potential changes in competitive forces and regulatory outcomes."

On a more positive note Moody's says Telstra "enjoys strong and dependable cash flows based on its near-ubiquitous network...[and] historically, Telstra has operated in an environment less competitive than those prevailing in many other developed markets; a situation which is expected to continue."

Moody's says the principal risk factor for the rating is "lower revenue and profitability associated with the impact of an evolving competitive and regulatory environment, and which is magnified by a subdued outlook for growth in industry revenues and margins."

Moody's notes that a negative ULL outcome - de-averaging charges across different regions - could adversely impact, and says that to a certain extent the negative outlook recognises this risk. However Moody' notes that "the company has a number of levers it can pull to mitigate the overall impact on its credit profile."

Moody's expects Telstra's financial profile to weaken in 2006, given the increased opex - including redundancy costs - and capex associated with its new-generation network strategy. "This will pressure Telstra's debt/EBITDA ratio - as adjusted - particularly given the company's aggressive dividends policy."