Moody's Downgrades Telecom NZ

Moody's Downgrades Telecom NZ

By Pattrick Smellie

Feb 17. – Moody’s Investor Services downgraded Telecom New Zealand Ltd yesterday, from A-2/P-1 to A3/P2, citing multiple challenges for the market-dominant telco.

The downgrade was signalled on December 16 last year, and Moody’s said the outlook was stable, with “a modest buffer” for shocks to the business, judged at the A3 investment grade level.

There was no medium term likelihood of an upgrade, “given the level of excution risk associated with the company’s transformation plan and the key challenges that Telecom faces over the next several years as it seeks to move to a next-generation telco model”.

Compared with rated sector peers internationally, Telecom had less scale, lower profitability and less developed product technology, justifying the downgrade.

A further downgrade could not be discounted, especially should Telecom “experience harsher than expected regulatory outcomes…increased or sustained competitive pressure on in retail pricing, or the full or partial fafilure of its current capital expenditure/transformation program such that leverage increases”.

Key indicators for Moody’s future assessments of Telecom could include:
• Debt/EBITDA ratios rising to 2.0 – 2.2x;
• EBITDA margin falling below 30 per cent on a shustained basis; or
• Protracted negative Free Cash Flow

Moody’s anticipated Telecom would experience negative free cashflow and rising debt for the next one to two years, thanks to its intention to continue paying high dividends and its capital transformation programme.

Telecom’s shares pared their gain after the announcement, and were up 0.4% to $2.50. The shares have tumbled 40% in the past 12 months.

(Businesswire)

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