Chorus debt rating on review for possible cut

Tuesday 4th December 2012

Chorus's Baa2 credit rating may be cut by Moody's Investors Service after the Commerce Commission released a draft plan to curb prices the company can charge retailers to access its network.

The review affects US$2 billion of debt. The regulator yesterday released a draft determination that would cut the price of Chorus's basic service relating to the unbundled local copper loop (UCLL) component of its unbundled bitstream access (UBA) to $8.93 per line a month from December 2014 from $21.46.

Chorus has said this will slash as much as 40 percent, or $160 million a year, from pretax earnings while changes to wholesale pricing for UCLL would have a $20 million earnings impact.

If implemented as proposed, the pricing cut is "likely to have a material impact on Chorus's credit profile and be inconsistent with a Baa2 profile," said Maurice O'Connell, a Moody's analyst. It would "exacerbate Chorus's negative free cashflow position and lead to materially elevated leverage, putting significant pressure on the company's key financial metrics."

The Baa2 rating is the second-lowest investment grade level issued by Moody's Investors Service. If Chorus's credit rating falls below investment grade while debt is still owed Crown Fibre Holdings for the government-sponsored fibre network build, the network company is banned from paying dividends without CFH's approval.

Shares of Chorus tumbled 14 percent to $2.91 after the commission's announcement yesterday, 3 cents lower than its listing price last year.

The draft determination isn't a done deal yet. Prime Minister John Key described the move as "very problematic" and Communications Minister Amy Adams has referred it to her officials to assess the pricing impact, saying a pricing methodology appropriate to New Zealand had to be found.

Among Chorus's concerns is the potential for much lower copper network pricing to deter investment and uptake of ultra-fast broadband, using the government-subsidised fibre network being laid throughout the country.

Chorus was spun-out from Telecom as a separately-listed company last year to free up the telecommunications company from its regulatory burden and allow the network operator to successfully win a billion dollar subsidy to build a nationwide fibre network and rural broadband system.

Some 80 percent of the network company's revenue is still derived from the ageing copper network, and is subject to the Commerce Commission's pricing review.

At a media briefing in Wellington, Telecommunications Commissioner Stephen Gale today stressed the UBA pricing regime was a draft decision and would go out to industry for consultation with a view to making a final ruling in June.

The UCLL service lets telecommunication companies use the copper network between an exchange and an end-user's premises to offer their own voice and broadband services. UBA gives access to Chorus's electronics, software and transport over the network, meaning telcos don't have to build their own.

BusinessDesk.co.nz

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