Telecom to review capital structure

Telecom is to review its capital structure - having split from its New Chorus network business last week - in order to maintain a crucial "A-band" credit rating.

With a decline in revenue from the split and increasing competition it will be crucial for Telecom to maintain its credit rating, or it would otherwise face increased borrowing costs.

Telecom chief executive Paul Reynolds said the new board had endorsed management starting the capital structure review. Further details are scheduled for release in February.

"Post-demerger, scope exists for some form of capital management, while still maintaining an `A band' rating, he said in a brief statement yesterday.

Telecom shareholders voted overwhelmingly in favour of splitting the company into two separate listed businesses, which began trading on the stock exchange more than a fortnight ago.

New Telecom retained the retail, mobile network, IT and internet business, while its network-lines business became New Chorus.

The demerger allows New Chorus to participate in the Government's ultrafast broadband programme, having won $930 million from the Government to install fibre-optic cabling around the country.

Craigs Investment Partners broker, Peter McIntyre, said he expected the review to be "in depth", as the outcome is to see a strengthening in the efficiency of Telecom's balance sheet.

It will be considering its debt-to-equity ratio, options for lower interest on borrowings, bank funding lines and is likely to consider options including a share issue, or consolidating the number of shares on issue, capital-raising or bond issues.

While it was too early to predict which route Telecom could go down, Mr McIntyre said the issuing of bonds was becoming increasingly more popular as companies sought alternative funding streams.

"Corporates don't want to be beholden to banks, who are fair-weather friends," he said.

At the time of the demerger completion, Forsyth Barr broker Suzanne Kinnaird said New Telecom was likely to have a declining revenue profile and face increasing competition. Cost savings would be critical to profitability.

Yesterday, she said Forsyth Barr, and most market analysts, were forecasting a target of debt reduction in Telecom in the next few years.

"There should be potential for Telecom to return capital to shareholders, whether by way of buybacks, special dividends or share cancellation if it wishes to maintain gearing around current levels," she said.

On New Chorus, she said last month it should become a stable regulated monopoly, and while it had a substantial capital expenditure programme and no guarantee of customer take-up, some of the government funding for the unused portion of the ultrafast broadband meant it mitigated some of the customer take-up risk.

simon.hartley@odt.co.nz