Chorus credit rating downgraded

TOM PULLAR-STRECKER
Last updated 15:50 21/01/2014

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Moody's has cut Chorus' credit rating from Baa2 to Baa3 and says the outlook is negative, meaning the next move is also likely to be downward.

Chorus said the effect of the downgrade would be an immediate but modest increase in the cost it would incur to borrow money.

The downgrade was foreshadowed in November when it emerged that the Government did not have the numbers in Parliament to overrule the Commerce Commission on copper broadband pricing.

Fellow ratings agency Standard & Poor's is also reviewing its BBB credit rating for Chorus and signalled in November that it could cut its rating by at least one notch. S&P analyst Richard Creed could not say today when that review would be completed as that was "market-sensitive information". 

Chorus shares, which had been retrieving a little of the ground they lost since touching a low of $1.275 late last year, fell 2.6 per cent to $1.50 in mid-afternoon trading today.

Chorus chief financial officer Andrew Carroll said the downgrade was disappointing, given that the new wholesale broadband prices would not come into effect until December and Chorus was exploring options to mitigate their impact.

"As we explained in December, we are assessing all options available to us, including cutting all discretionary activity, repricing commercial services, generally managing for cash and assessing capital management options. We have also commenced constructive discussions with Crown Fibre Holdings," he said.

"In addition, Chorus has appealed the commission's initial [copper broadband] decision to the High Court and requested that the commission undertake economic cost modelling ... as allowed for by the legislation."

Moody's senior analyst Maurice O'Connell said the downgrade to Chorus' issuer and senior unsecured ratings reflected "higher capital expenditure and operating expenses compared to our original expectation", as well as the impact of regulatory decisions.

It acknowledged Chorus was taking steps to mitigate the impact of lower wholesale copper broadband pricing and said the regulatory environment could improve.

It nevertheless expected Chorus' adjusted debt would reach up to five times its annual earnings before interest, tax, depreciation and amortisation within three to four years.

"That is considerably higher than Moody's expectation and no longer consistent with the previous Baa2 rating," it said.

It said Chorus would breach its bank covenants if it could not offset the price cuts ordered by the Commerce Commission.

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The same observation was made by Standard & Poor's in November.

- Fairfax Media

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