New Telecom and New Chorus likely to have lower credit ratings
Aug. 31 (BusinessDesk) - Should Telecom Corp.'s demerger into separate services and network companies proceed, both companies are likely to have lower credit ratings than the phone company currently enjoys.
International ratings agency Standard & Poor's says it is likely to cut services company New Telecom's rating one notch below Telecom's current rating to “A-” and that it will rate network company New Chorus an investment grade “BBB.”
Fellow agency Moody's Investors Service says it would assign its equivalent ratings of “A3” to New Telecom and “Baa2” to New Chorus.
“The loss of (Telecom's) core monopoly asset – its copper access network – will substantially weaken the earnings and cashflows of New Telecom relative to the pre-demerger credit profile,” Moody's vice-president and senior credit officer Ian Lewis said in a statement.
“At the same time, the expected new, de-leveraged, capital structure of New Telecom is likely to be materially strengthened post-merger and will provide a major counterbalance to offset the diminution in earnings,” Lewis said.
He expects operating conditions will remain “extremely competitive” for New Telecom.
New Chorus will be the nation's largest provider of wholesale fixed line services via both copper and fibre networks. “This business is expected to deliver predictable revenue with high margins.”
Chorus, which will build most of the government's ultra-fast broadband (UFB) network, will have substantial capital spending.
S&P said its rating of New Telecom “would reflect our opinion of the group's modest financial risk profile and significant market position as the largest provider of telecommunications products and services in New Zealand.”
These strengths would be tempered by “the intensifying competitive environment in both fixed and mobile telecommunications services in New Zealand and the execution risks associated with delivering new products, technologies and cost-reduction initiatives,” S&P said.
It said Telecom's existing integrated business model and access to network revenues “were key credit strengths … accordingly, we expect to lower our assessment of (Telecom's) business risk profile to 'satisfactory' from 'strong' following the demerger.”
While Telecom is likely to remain the second largest mobile phone retailer and the quality of its 3G network should allow it to maintain and modestly grow its revenue share of the market, competition from new player Two Degrees Mobile Ltd. is “creating significant price competition that is likely to moderate any meaningful revenue and margin growth.”
Telecom is also likely to lose some fixed-line market share.
S&P said its “BBB” rating of New Chorus “reflects our view of the company's strong market position as the dominant fixed-line telecommunications access network in New Zealand, high capital barriers to competition and strong operating cash flow.”
Offsetting those strengths are the risk of customers switching to mobile phones and the execution risk of the UFB rollout.
“The rating incorporates an expectation that mobile-only households will continue to grow and could reach up to 15% of the New Zealand population in the next five years from about 5% currently.”
However, increasing demand for data-intensive products and the ongoing convergence of fixed and mobile networks, together with free local calling and the relatively high mobile costs in New Zealand, should underpin demand for Chorus' network, S&P said.
Telecom expects the demerger, a condition of Chorus winning the UFB rollout, to happen by the end of November.
One the split is complete, New Chorus will be saddled with most of the combined company’s net debt at about $1.7 billion, while New Telecom will have between $750 million and $950 million of debt.
Telecom sank 7.3% to $2.53 in trading today, though are up 27% this year.