Telecom placed on credit watch by Fitch Ratings

Monday 30th May 2011

Fitch Ratings has placed Telecom's credit rating on "rating watch negative", citing the separation of its network, which was necessary to win government ultrafast broadband contracts.

The move by Fitch today came after Standard & Poor's said on Friday that the company could be downgraded by one or two notches when it separates its network arm Chorus from the rest of its business.

Fitch said its "rating watch negative" would continue until there was greater clarity over the capital structure and financial policies of the remaining company. It expects this by September.

"Fitch believes possible outcomes include an affirmation of the A minus ratings or a downgrade of the ratings. Any rating downgrade would be between one to two notches."

S&P said if shareholders approved the de-merger of Chorus into a new standalone company, it would likely result, all things being equal, in a lowering of long-term rating on Telecom by one or two notches.

Telecom is separating Chorus from the rest of its business after being selected to build 70% of the Government's ultrafast broadband network.

The de-merger will be effected via a court-approved scheme of arrangement by late 2011, and the transaction is subject to certain conditions, including stakeholder approval and legislative changes.

After the separation Telecom would lose a distinctive advantage of owning both fixed-line and mobile platforms and would have limited flexibility to maintain control over tariffs, product offerings and costs, Fitch said.

"Fitch expects erosion of Telecom's fixed line market share over the medium term given the different industry structure. Post separation, the agency considers Telecom's business risk profile will have increased."

NZPA

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