Chorus rating to be reviewed

Chorus investors have taken comfort from comments by the prime minister over the Commerce Commission's draft ruling on broadband pricing and brushed off a possible Moody's downgrade.

After falling more than 14 per cent to $2.91 yesterday, Chorus shares opened up 4 cents at $2.95.

Analyst Morningstar cut its valuation of Chorus shares by 10 per cent to $3.60 but still advised investors to "accumulate" shares in the company.

It said it expected a better outcome for wholesale broadband pricing when the commission finalised its pricing decision in June, than in its draft ruling published yesterday. 

Ratings agency Moody's will review and may downgrade Chorus' credit ratings in the wake of yesterday's draft ruling by the Commerce Commission that could cut the price Chorus can charge for broadband connections.

Moody's put Chorus' "Baa2" issuer and senior unsecured ratings on review for possible downgrades.

The commission's draft decision would likely have a material impact on Chorus' credit profile, if implemented, that would be "inconsistent with a Baa2 profile", senior analyst Maurice O'Connell said.

"We note that the proposal ... is currently in draft form and that it remains subject to 'robust consultation with all parties'. Nevertheless, at this stage, the potential for a final adverse outcome on Chorus' credit profile is meaningful," he said.

Chorus yesterday dodged a bullet from regulators only to step into the path of a rumbling tank.

The commission trimmed the price Chorus could charge for phone lines by less than $1 a month to $23.52, having threatened a $5 cut in May.

But it proposed slashing the price Chorus can charge for broadband connections by more than $12 from $21.46 to $8.93, from December 2014. That sent its shares down 49 cents to $2.91. Chorus' broadband connections are usually sold along with a phone line.

Chorus said the combined effect of the decisions, if the broadband price cut was confirmed in June, would be to knock $170 million to $180m off its earnings before interest, tax, depreciation and amortisation (Ebitda).

The price changes would have the effect of narrowing the differential between the cost of broadband services that were delivered using unbundled phone lines and internet providers' own equipment, versus those wholesaled from Chorus.

Kordia New Zealand chief executive Scott Bartlett said that could have the immediate effect of removing internet providers' financial incentive to unbundle Chorus' exchanges.

"I think Chorus has had a very good day. If I wasn't conflicted, I might go out and buy some Chorus shares," he said.

CallPlus chief executive Mark Callander said it would need to "completely review" its own plans to unbundle a further 100 Chorus exchanges. Both he and Bartlett said yesterday's announcements could kill investment in superfast copper broadband technology VDSL2.

Telecom was the obvious beneficiary of the commission's announcements, Callander said, as it was currently banned from unbundling but would see its costs fall if a big wholesale broadband price cut was confirmed.

The commission had to review the price of Chorus' copper services as a result of two government decisions made at the time it gave approval for the $3.5 billion ultrafast broadband network.

One was to set a single nationwide price for unbundled phone lines, and the other was to change the methodology for regulating wholesale copper broadband pricing from one that set the price at a discount to Telecom's retail prices to one based on a mark-up on Chorus' costs.

Telecommunications Commissioner Stephen Gale said all the commission could do was calculate those costs, not add a margin "to help out UFB", and as such there was "no way [Chorus] can miss out on what is promised in the legislation".

Gale said it was a decision for ministers whether it was time for another approach. Prime Minister John Key signalled yesterday that was a possibility.

He did not rule out using legislation to overturn the proposed broadband price cut yesterday. Speaking at the post-Cabinet press conference, Key told reporters that the commission's report posed problems for the roll out of ultrafast broadband (UFB).

"It has significant implications both for [Chorus] and for UFB. It substantially reduces the income of that company and its capacity around broadband," he said.

Chorus said it had "very serious concerns" about the potential impact of the commission's decisions, which could require Chorus to "fundamentally rethink its business model, capital structure and approach to dividends".

"The world is watching to see if New Zealand's world-leading ultrafast broadband policy and the demerger of Chorus as a wholesale-only company will be a success story," it said.

Chief executive Mark Ratcliffe said the company planned to talk to the Government.

"At the very least, we believe that the Government should immediately look to bring forward the regulatory review already required by legislation in 2016, in order to bring about a sustainable framework next year that will support the ultrafast broadband vision," he said.

Fairfax Media