Ratings agency puts Telecom debt on negative outlook on breakup prospect
Standard and Poor's has cut its outlook for Telecom Corp of New Zealand's A long term and A-1 short term credit ratings to negative after it announced it may be structurally separated. Telecom's Chorus copper access network could be broken off Telecom and sold to other parties, including, potentially, the government. Telecom has NZ$2.1 billion of long term debt and NZ$206 million of debt due to mature within one year.
Here is the full statement below from Standard and Poor's:
Standard & Poor's Ratings Services today said that it had affirmed its 'A' long-term and 'A-1' short-term corporate credit ratings on New Zealand-based telecommunications company Telecom Corp. of New Zealand Ltd. (TCNZ). At the same time, we revised the outlook on the long-term rating on TCNZ to negative, from stable.
The outlook revision follows TCNZ's recent confirmation that it is considering a structural separation of its copper access network from its remaining businesses in order to participate in the New Zealand government's proposed "Ultra Fast Broadband" fibre-to-the-home network.
"We consider TCNZ's vertically integrated business model to be a key driver of the group's strong business risk profile," Standard & Poor's credit analyst Paul Draffin said. "Accordingly, any separation of the fixed-line access network will have a material negative impact on TCNZ's business risk profile." The prospect of structural separation also comes at a time when the group continues to face operating and competitive challenges in its core mobile network business.
Assuming structural separation proceeds, TCNZ's business risk profile would become increasingly dependant on its mobile business and its large but increasingly competitive fixed line retail business. Furthermore, the company's lower credit quality ICT and Australian businesses will become a larger contributor to group earnings.
A lowering of the long- and short-term ratings on TCNZ could occur in the next 12-to-18 months if: TCNZ agrees to structurally separate it copper access network from the rest of the group; The group's financial profile deteriorates, including fully adjusted debt to EBITDA increasing to more than 2x on a sustained basis; or There is a significant shift in earnings mix to lower-quality earnings sources, such as information technology services.
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