Telecom credit rating may be cut by Moody's

Tuesday 16th December 2008

Telecom Corp.'s A2 long-term credit rating cut by Moody's Investors Service as a shrinking New Zealand economy exacerbates the impact of competition, which has squeezed its profit margin.

Telecom has suffered a "significant erosion in its margins and under current recessionary conditions Moody's believe that this situation will not be easily reversed," the ratings company said in a statement.

The rating, which covers some NZ$2.4 billion of Telecom's debt, may be lowered on the prospects of the company taking on more debt to fund its expansion and maintain dividend payments.

There are "ongoing challenges ahead for the company's core businesses amid heightened recessionary conditions in New Zealand as well as a material weakening in financial metrics over a period of time, relative to its major peers," Moody's vice president Ian Lewis said.

Figures next week are expected to show New Zealand's economy contracted 0.4% in the third quarter, extending the nation's first recession since 1998. The review will focus on Telecom's ability to maintain cash flow and the impact on gearing of its capital spending plans, Moody's said.

Telecom's first-quarter profit fell 34% to $149 million as the company increased spending to roll out its high-speed network. Sales rose 2.3%.

Chief financial officer Russ Houlden last month said the company's balance sheet "remains strong, and thanks to a prudent and farsighted approach to our financing requirements we are well positioned to meet our commitments."

The company's shares rose 0.4% to $2.37 and have declined 45% this year.

By Jonathan Underhill

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