S&P report finds extra debts rising

By Rob Hosking

Friday 22nd September 2000

Already leveraged New Zealand firms are piling on extra debt to reposition themselves for the new economy.

A quarter of New Zealand corporates rated by Standard & Poor's over the past year suffered a credit downgrade, the company said this week.

Those downgrades reflected a renewed appetite for debt among New Zealand companies - but that appetite is in line with international trends.

Much of this is driven by a wave of mergers and acquisitions, S&P's analysts say. In New Zealand, the most active sector has been electricity, and the agency expects the average credit rating to drop to the BBB area, according to a report released this week.

"That reflects the fact the investors today are generally more comfortable with ratings around BBB than they used to be," said the agency's director of infrastructure finance ratings, Louise Griffiths.

Ms Griffiths and the agency's director of corporate ratings, Paul Stephens, passed through New Zealand this week.

Electricity firms are not typical of such New Zealand companies. More common are firms like Telecom, Air New Zealand, Kiwi Co-operative Dairies, which are expanding overseas and borrowing money to do so.

The credit downgrades did not reflect any lesser view of the companies' overall position, simply their credit exposure, Mr Stephen said.

"We're looking more at credit quality, and the focus is very much on operating cashflows and how much safety margins are provided to lenders for debt servicing.

"Telecom's move to buy AAPT, for example, was an extremely sound strategic move; it is a venture into a larger market and with a company which is in a good position to take advantage of growth areas in telecommunications, like data and mobile. New Zealand companies are looking elsewhere for growth, which makes sense. And that growth is primarily debt funded."

It is growing investor concerns about those debt levels which has seen Telecom's share price tumble since it announced the AAPT move last year. That fall has been accelerated since April this year. Telecommunications stocks in general are much less popular around the world - and the high level of debt carried by carriers as they merge, take over other firms and, in most countries, spend big dollars for third-generation spectrum, is a major cause.

But the S&P release makes it clear such debt levels are hardly confined to telecommunications firms. "It's a cost of funds issue. Equity holders are also demanding a bit more and firms are being driven to work their balance sheets harder."

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