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Telecoms infrastructure provider Chorus warns of cash crunch and possible default next year under new proposed copper line pricing

Telecoms infrastructure provider Chorus warns of cash crunch and possible default next year under new proposed copper line pricing

Telecommunications infrastructure company Chorus is warning of a cash crunch and even possible default if new proposed copper line charges announced today by the Commerce Commission proceed.

The full media statement from the commission can be read here.

All eyes will now be on the Government to see what action it takes on the matter.

Communications and Information Technology Minister Amy Adams put out a brief statement.

She said: "Now that the final UBA [unbundled bitstream access] price is known, the Government will consider its options in detail before making any further decisions."

Chorus' annual report says its debt includes a $1.35 billion syndicated bank facility of which $155 million was undrawn at June 30, and £260 million worth of bonds.

The annual report says none of the debt is secured against assets.

The Chorus share price was down 20c, or 7.6% to $2.43. The shares are down over 25% in the past 12 months.

This is the statement Chorus released to the NZX on the matter:

The Commerce Commission has today released its final decision on the pricing for Chorus' copper broadband (UBA) service.

The Commission’s final benchmarked UBA price of $10.92 is around a 50% reduction from the current $21.46 monthly charge. This means that the $44.98 per month Chorus currently charges retail service providers for a copper line and copper broadband service would reduce to $34.44.

Under current legislation this pricing will apply from 1 December 2014 and Chorus estimates that this will have around a $142 million annualised EBITDA impact, based on connection numbers at 30 September 2013. This is in addition to the around annual $20m EBITDA reduction from the December 2012 UCLL benchmarked decision. Chorus’ NPAT for the year ended 30 June 2013 was $171 million.

The UBA price announced today would imply around a $1 billion funding shortfall by 2020, reflecting a combination of loss of operating cash flows, reduced borrowing capacity and increased interest and funding costs.

“Without the proposed Government intervention, the loss of these revenues would have two very negative consequences for Chorus’ funding ability,” said Mark Ratcliffe, Chorus CEO. “We would have much less cash every year to invest and we simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.”

“The ability to finance the business cases of both Chorus and other LFCs, which were agreed when the UFB contracts were awarded, is missing from today’s decision. This decision also undermines the intention to incentivise an efficient transition onto that network by attractive entry level fibre pricing. There is no guarantee this proposed reduction in wholesale prices would be passed through to consumers.”

Consequences of today’s regulatory decision

At the time of the Commission’s draft UBA decision on 3 December 2012, Chorus said that it may need to fundamentally rethink its business model, capital structure and approach to dividends.

Following today’s final UBA decision, and absent timely intervention by the Government to realign the policy settings to support the investment in and transition to fibre, Chorus will need to do the following:

• Discuss today’s decision with existing lenders as well as the rating agencies who analyse Chorus’ credit worthiness. Chorus was placed on “outlook negative” by Moody’s in March this year following a review initiated when the draft UBA decision was released; 
• Notify its bank lenders that absent the anticipated Government intervention in Chorus’ view this price change is likely to have a material adverse effect on 1 December 2014 under the terms of Chorus’ borrowing arrangement. If this did occur lenders would be entitled to trigger an event of default; 
• Evaluate the appropriateness of Chorus’ business model and the nature of its existing commitments. The combination of significantly reduced operating cash flows, reduced borrowing capacity and increased cost of capital fundamentally changes the business model envisaged prior to demerger; 
• Discuss with the Crown whether Chorus is still a credible UFB partner in the way intended at demerger and how Chorus might deliver the balance of its programme despite the very material funding gap in Chorus’ business implied by this decision; 
• Review Chorus’ current capital management settings, including capital structure, dividend policy and the potential need for a large future equity raising; and 
• Conduct a detailed evaluation of other options to minimise financial downside for Chorus.

“We are intensely disappointed with today’s decision. We are proud of our role as a cornerstone partner in delivering the Government’s vision to build a fibre future for New Zealand. Chorus is ahead in its UFB build programme, is leading an industry transition to fibre and making other investment to improve broadband in New Zealand. But unless the Government intervenes, it is likely that the benefits for New Zealand will be significantly compromised,” Mr Ratcliffe said.

Today’s benchmarking decision is once again below the cost of providing the service, and Chorus is now set to take up its option to move to a full economic cost model for the UBA price. Together with UCLL this process may take around two years, leading to ongoing uncertainty for the entire industry. There is a vast range of evidence that supports today’s aggregate price of $44.98.

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Didn't John Key recently make this comment:
If Solid Energy was partly privatised, it probably would not be in the mess it is in now, Prime Minister John Key says.
Continuing to defend the Government's sell-down of state assets, Key said today a deal to bailout Solid Energy might not have been necessary had the company been partially floated.
"My own personal view is if we'd had the mixed ownership model applied to Solid Energy, it may well not have gotten itself in the mess it did," he told Firstline.
"That's because the external analysis would have rung a lot of bells and demanded a lot more accountability," he said. Read more
Is Mark Ratcliffe belatedly ringing the bell on Chorus? Should the government jump as high as Ratcliffe seems to be demanding?

Yet I'd suggest the reason it tried so many wierd and wonderful alternative revenue streams is because of the returns demanded by its shareholder, JK's Govn. So in order to meet the avarice it took risks that blew up in its face.

And Chorus's excuses are?
Nonetheless, yet another "bottom of the cliff" economic endeavour initiated and funded by the Key government on our behalf.

My guess is that the CEO....Don Elder.... was somewhat incompetant...
Maybe he thought oil was going to run out tomorrow and that the price of coal would be like gold..??    :)

Yes,  very incompetant IMHO, but really that could be economically or idealogically blinkered, or all three.
1) I think he and many missed and still miss that there is a limit above which our global economy cannot afford to pay for energy.  Lignite to synth-oil, fertilizer etc etc all suck in terms of EROEI and ability to pay. So we go into a recession.
2) Yes, gold like they thought, but see 1).
3) Not run out, but only  a half whit cant see there is a difference between the demand and the supply worked out via the price model is whats happening, see 1).   Unles of course you suscibe to conspracy theories.  Occams Razor.
4) I kind of hoped by now the brighter ones have realised there is a difference between running out circa 2050 when its gone and no more per day, circa 2006, see 1)
So consider Air New Zealand in terms of 1)  The board is spending big money on new planes underwritten by the tax payer assuming the company has a future.   The interesting thing is its even running (or was) biofuel trials.  So plant derived Jet A1 taken from crops or lands for crops that people will need in the future.  Who decides where this output from the land actually goes?  Do we continue to subsidize Air NZ and air travel while ppl are hungry?  aka Ethanol and Mexico?
I really wonder.

Steven, China's economy grew by 7.8% which doesn't gel well with yor thesis that Solid Energy's poor performance and low coal price i due to peak energy especially given that coal's low price is due largely to China's shift away from difrty coal toward cleaner energy alternatives, because of its chronic pollution problems. If the world's poor economic performance was due to the cost of energy why would China be shifting towards energy sources which are even more expensive?

Elder ...somewhat incompetent Roelof...? in fact ranked in the top ten highest paid incompetents of all time.
 I got some brilliant ideas see.....
What are they Don...?
Well with the price of coal set to skyrocket....
 Who told you that..?
Well I just know it see, feel it see, that's why I sit here and you sit there see...!
Sure sure Don carry on.....
 Sunflowers gentlemen sunflowers and barren earth..!
Didn't we get a report saying they won't grow there..?
Never mind all that,  my connections supplying the stock tell me they'll grow on the bloody moon...
 How much  are we up for Don.....?
A squillion or so, but it will pay off in spades when the coal spikes, uh.
Right then Don ,your the man we need to innovate around here let's do it. You  ah ,need any extra pocket money before we finish up here...?
If the board can reimburse me for skipping a few lunch breaks it would help.....

Ah the geniuses in the private sector. The ones who ran Air NZ so well perhaps. Tranz Rail? Media Works? Yellow? Feltex? If you run a high debt business model you need a good business plan and some luck regarding timing and the business/credit cycle. Private ownership doesn't save you from greedy over ambitious executives and expectant shareholders.

Classic case of principal agency problem, where the board of directors as the agent of shareholders, put their interests before that of the principal (shareholders), or the health of the firm they manage. This has become an issue in the case of Mighty River Power who bought shares in their own company when they wee cheap and have since used company cash to buy shares on the open market in order to boost share value. It also happened in the case of Rural Equities where the owners of the majority shareholder of the company and who gained proportionately the most from the buyback also sit on its board.

Boo hoo hoo. Chorus you are a large corporation run by experienced and talented (isn't that why they get the big salaries??) executives and directors. You took a calculated gamble on the UFB rollout, borrowing heavily yet still paying good dividends, and knowing full well that a Commerce Commission review was in progress. If your gamble hasn't paid off, tough. Suck it up like any other business. In the very unlikely event you go broke, tough again. Maybe it will be another salutory lesson about your business model of borrowing heavily and hoping or tacitly relying on government intervention to protect your shareholder's profits. John "I don't want Chorus shareholders to lose money" Key should resign. His alarmist statements over this whole fiasco are shameful. The concept of a level playing field has no meaning for this government with Key and Joyce running it. One suspects those Chorus creditors are squealing loudly behind the scenes

Telecom was privatised 2 decades ago right? Since then they've had handsome profits largely because of the monopoly they were gifted, and somehow once NZ is a decade behind the world in data speeds they need a bailout from the taxpayer to put in the infrastructure they should have done ages ago?
Put Guttung and Deane and Ministers Adams and Joyce in the stocks! This is nothing but a scam.

It could well be described as Control Fraud as explained by Bill Black. Execs take the money and control, information and accounting to create envrionment that works for them but may not actually work in the best long term interest of the company - very hard to know

This is infrastructure and a classic case of something that should be done by the collective, which is represented by the government, or at least, should be