S&P's cut to rating affects 2degrees

2degrees' majority owner Trilogy International has seen the "junk" credit rating on hundreds of millions of dollars it owes bond holders cut from bad to worse by Standard & Poor's.

The cut left some analysts questioning whether and how mobile phone company 2degrees would be able to fend off stronger price competition from Telecom and Vodafone and fund the upgrade of its network to next-generation 4G technology.

S&P cut the rating of US$370m of bonds that Trilogy issued in 2010 from CCC+ to CCC, while leaving its B- corporate credit rating unchanged.

Australian analyst Paul Budde said the rating cut reflected concerns he had harboured over Trilogy "for the last decade" and he "could not see a happy ending for 2degrees".

IDC analyst Glen Saunders said that while he had questions over how and when 2degrees would finance future upgrades of its network, including 4G, it had achieved strong customer growth and he would be surprised if it was not able to bring in new investors if required.

S&P said Trilogy's lower corporate credit rating reflected the company's "vulnerable" risk profile, "less-than-adequate" liquidity and "highly leveraged" position. Rival ratings agency Moody's changed Trilogy's already sub-prime "B3" corporate credit rating from a stable to a negative outlook a year ago, citing similar concerns.

Trilogy owns stakes in mobile carriers in Bolivia and the Dominican Republic as well as New Zealand, but sold its 95 per cent stake in Haitian operator Voila in March.

S&P said "near term business challenges" would probably prevent it improving its financial position this year or next.

S&P said the cut to the credit rating of the bonds reflected the fact that other debtors, which include China's Huawei, had priority security over 30 per cent of Trilogy's assets.

Huawei, which was last week subject to a critical United States congress report over spying risks, directly lent 2degrees NZ$120m to buy network equipment supplied by the Chinese firm.

Budde did not believe there was any prospect of Huawei taking over 2degrees' network if the debt could not be repaid, speculating that Huawei would simply write off the funding in that scenario and that 2degrees might morph into a reseller of Telecom or Vodafone's network.

Such mobile network sharing would be a natural evolution for the industry, he said.

"I see the mobile market moving in the same direction as the fixed market.

"Eventually you will have a ‘utilities-based infrastructure' and [retail] competition on top of that."

2degrees chief executive Eric Hertz said 2degrees had managed to maintain its revenue growth this year when it remained on track to break even before interest, tax, depreciation and amortisation, and was confident about its ability to compete in 4G.

"We are pleased with the continued growth and love the competition we have created in the market."

Hertz suggested the Government should bear that in mind when deciding how to allocate radio spectrum that will be released for 4G mobile networks by the closure of analogue television transmissions next year.

"We are eager to hear how the allocation process will unfold and continue to advocate for a process that encourages and enables the level of competition now present in the mobile market to continue," he said.


AAA — Extremely strong

AA — Very strong

A — Strong

BBB — Adequate

B — Vulnerable

CCC — Currently vulnerable

CC — Currently highly vulnerable

D — In default

Contact Tom Pullar-Strecker
Infotech editor
Email: tom.pullar-strecker@dompost.co.nz
Twitter: @PullarStrecker

The Dominion Post