Telecom up on downgrade

By NZPA

Tuesday 18th June 2002

Telecom's share price has surged 11c to $5.31 after international ratings agency Moody's yesterday caned it with a credit downgrade.

The stock in New Zealand's largest listed company gained 5c last night and a further 9c today to $5.34, when many market watchers would have been expecting a weakness in the share price.

Moody's downgraded Telecom and its subsidiaries' senior unsecured ratings to A2 from A1, and its New Zealand subordinated ratings to A3 from A2.

The revised credit ratings reflected continued underperformance of Telecom's Australian operations, but took into account the company's strong leading position in its home market, it said.

"As a result financial measures of creditworthiness remain weak at the A2 level and improvements are dependent on planned debt reduction in the next two years."

Its ratings outlook was negative because of the challenges Telecom NZ faced in successfully implementing its business plan in Australia.

Macquarie Equities senior analyst Arthur Lim said the downgrade was not much of a surprise. Rating agencies had decided that "worldwide the (telecommunications) sector had far too much debt", Mr Lim said.

The news on Telecom was not new in Australia, he said.

Telecom expanded into Australia more than two years ago with the acquisition of AAPT, but the foray across the Tasman has not, as yet, run smoothly.

Mr Lim said Telecom's fightback could be explained by its ability to generate growth in earnings.

"Telecom is one stock among most of the others (worldwide) that has continued to show growth in earnings in the last year and a half."

Telecom's chief financial officer, Marko Bogoievski, said he was disappointed that Moody's had assigned a rating with a negative outlook, as the group was confident of improving cashflow and credit fundamentals. "Our drive for better performance, particularly in Australia, is producing significantly improved results," Mr Bogoievski said.

Telecom's earnings before interest, tax, depreciation and amortisation for the quarter ended March 31 were $573 million, up 7.3 percent on the same period in 2001, he said. "Capital expenditure is also being kept under a tight rein."

Moody's said it had noted TelstraClear was now Telecom's only major competitor in the fixed line market, with a share of 10 percent.

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