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What does Moody’s downgrade of Chorus mean?

Yesterday Chorus announced Moody’s Investors Service cut the company’s credit rating. It is now sitting at Baa3. Previously it was a Baa2. Moody's also said Chorus has a negative outlook.

The change comes mainly because of the likelihood of regulated cuts to the prices Chorus can charge customers to access the copper network. Moody's also explained that Chorus faces higher capital expenditure and operating costs than it previously expected.

In the arcane language of investment ratings, Moody's Baa3 is at the bottom end of its investment grade band.

In plain English it means it now rates Chorus as a slightly more risky investment - but not a dangerous one.

This may mean Chorus will have to pay investors a slightly higher rate of interest to reflect the increased risk. In other words, borrowing could be more expensive which will in turn put yet more pressure on profits and margins.

The words 'may' and 'could' are important here, this is only a small downgrade and many institutions will have already priced the regulatory risk into their view of Chorus.

The negative outlook part of the announcement effectively says the ratings company doesn't expect the regulator - that's the Commerce Commission - to back down or otherwise change the price the company can charge in the near future.

A Moody's analyst put it this way:  “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.

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

[digitl 2014]

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