Moody's cuts Chorus credit rating to Baa3 as regulatory risk looms

Tuesday 21st January 2014

Moody's Investors Service has cut Chorus's credit rating a notch to the bottom of its investment grade band over the prospect of enforced price cuts to its copper line service.

The rating agency downgraded Chorus's rating to Baa3 from Baa2, and kept a negative outlook, over the regulatory risk hanging over its earnings stream from services delivered on the copper network, and higher capital expenditure and operating expenses than originally anticipating, Moody's said in a statement. The negative outlook was due to the uncertainty around whether Chorus can alleviate the regulatory risk, Moody's said.

"The recent NZCC (New Zealand Commerce Commission) regulatory decision regarding UBA (unbundled bitstream access) pricing will have an adverse impact on Chorus's financial profile, with annual EBITDA (earnings before interest, tax, depreciation and amortisation) decreasing by around 20 percent from 2015 absent measures being contemplated by Chorus," senior analyst Maurice O'Connell said.

"As a consequence we expected adjusted financial leverage, measured as debt/EBITDA, will likely exceed the tolerance level set for Chorus's Baa2 rating," he said.

The rating agency anticipates Chorus's leverage will likely increase as the fibre roll-out continues, and said the company's banking covenants would be breached in 2015 if the network operator can't alleviate the impact of the regulator's decision.

The company's shares fell 5.8 percent to $1.45 in trading today, and have gained 6.9 percent this year.

Chorus is in talks with Crown Fibre Holdings over its role in building the government-sponsored ultrafast broadband network after the Commerce Commission proposed slashing the network operator's pricing on the regulated copper lines. That's left a $1 billion hole in its funding to finance the roll-out, and Communications Minister Amy Adams has indicated she expects the company to fill some of that gap.

As part of its contract with Crown Fibre Holdings, Chorus has to maintain an investment grade credit rating if it wants to pay dividends to its shareholders without the Crown entity's approval. Standard & Poor's put Chorus's BBB rating on CreditWatch negative in November.

Chorus chief financial officer Andrew Carroll said the downgrade was disappointing given the pricing decision doesn't take effect until December this year, and that the company is still trying to mitigate the regulatory risk.

"We are assessing all options available to us, including cutting all discretionary activity, re-pricing commercial services, generally managing for cash and assessing capital management options," Carroll said.

"We have also commenced constructive discussions with Crown Fibre Holdings. While this work continues, we cannot finalise our medium term strategy or capital management settings," he said.

BusinessDesk.co.nz

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