S and P joins Moody's in reviewing Chorus credit rating after pricing review

Wednesday 6th November 2013

Standard & Poor's has joined Moody's Investors Service in putting Chorus's credit rating on review following the regulator's decision to cut the price the network company can charge for access to its ageing copper lines.

Chorus's BBB rating has been placed on CreditWatch Negative, meaning it has a 50-50 chance of cutting the rating in the next three months. Earlier today, Moody's placed the company's Baa2 rating on review for a possible downgrade. Chorus has the second-lowest investment grade rating.

If Chorus's credit rating drops below investment grade while it still has outstanding debt owed to Crown Fibre Holdings, the network operator is prohibited from making dividend payments without the agency's approval.

Telecommunications Commissioner Stephen Gale yesterday announced the total unbundled bitstream monthly price had been set at $34.44 per line, up from the $32.35 price initially proposed but down from $44.98 currently.

"Our forecasts indicate that the determination, if implemented without amendment, will result in Chorus' financial metrics falling outside expectations for the current rating from fiscal year ending June 30, 2015," said Standard & Poor's credit analyst Paul Draffin. "Furthermore, without offsetting credit-supportive actions, the group will likely also breach covenants under its debt facilities from fiscal 2015."

Draffin said S&P expects to get "greater clarity on the NZ government's reaction to the decision and any response, as well as Chorus' strategies to mitigate the expected credit impact" in the next three months.

Moody's senior analyst Maurice O'Connell said in a separate statement today that the regulator's decision "will exacerbate Chorus's negative free cashflow position and lead to a materially elevated leverage, putting significant pressure on the company's key financial metrics."

Chorus shares dropped 4.5 percent to $2.34, having fallen 6.8 percent after Gale made his announcement yesterday, while the company warned the price cut could slash $142 million from annual earnings and force it to renegotiate terms with lenders. Some US$1.5 billion of debt is covered by Moody's ratings.

Investors are speculating there is a high degree of probability that the government will intervene to push back on the regulator's plans or in some way compensate Chorus to ensure the roll out of UFB isn't derailed.

BusinessDesk.co.nz

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