Sluggish NZ market affects Telecom rating

By Phil Boeyen, ShareChat Business News Editor

Monday 3rd September 2001

Telecom's (NZSE: TEL) long-term corporate credit rating has been dropped to A from A+ by ratings agency Standard & Poor's, citing such factors as a sluggish New Zealand economy and a high level of competition in Australia.

Telecom Finance's capital notes have also been lowered to BBB+ from A- in the review, while the telco's short-term rating remains at A-1 and its outlook is stable.

Standard & Poor' says Telecom may require significant ongoing capital expenditure to expand revenue growth in the Australian market, which will impede a sizeable debt reduction in the next two to three years.

"Although TCNZ has taken steps to restore its financial risk profile following the NZ$2.1 billion acquisition of AAPT- evidenced by the NZ$500 million raising of new ordinary shares and change in dividend policy in fiscal 2001 - an increasingly competitive operating environment may hinder significant further restoration in the short to medium term," says S&P associate, Andrew Lally.

"In the absence of asset sales and further equity issuance, the level of expected discretionary cash flows will enable only moderate improvement in TCNZ's credit protection measures in the next two years.

"Furthermore, asset sales, though not contemplated in the medium term, are more difficult in an environment of declining sectoral asset values."

S&P says Telecom's market position in New Zealand is expected to remain very strong, providing a solid source of cash flow for the group's expansion into Australia, accounting for 70% of group revenues and 95% of group Ebitda in fiscal 2001.

"Nevertheless, TCNZ's calling businesses are expected to be hurt by further pricing pressure, with the sluggish New Zealand and Australian economies making it difficult to achieve sufficient traffic volume growth to offset the effect of margin compression on operating cash flows."

The company's outlook has been rated stable because of its prominent market position in New Zealand, which is expected to generate sufficient cash flows to fund the expansion into the Australian market and underpin credit protection measures.

Telecom says its disappointed with the lowered rating.

CFO, Marko Bogoievski, says since its acquisition of AAPT the company has taken major steps to enhance its financial profile.

"We disagree with the Standard & Poor's view. Telecom has strong operating cash flows in New Zealand and we're satisfied with our progress in the Australian business."

Mr Bogoievski says the Standard & Poor's decision is in contrast to Moody's announcement last week confirming its rating on Telecom senior unsecured debt at A1, which is equivalent to Standard & Poor's A+ rating.

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