The Government had a pivotal role to play to end the
uncertainty surrounding the pricing for Chorus' basic services,
Craigs Investment Partners broker Chris Timms said yesterday.
Moody's Investors Service may cut Chorus' Baa2 credit rating
after the Commerce Commission released a draft plan to curb
prices the company can charge retailers to access its
Standard and Poor's said its ratings on Chorus (BBB/stable)
were unaffected by the commission's draft decision.
''Importantly also, we note that there remains significant
capacity for Chorus to accommodate regulated reductions in
network access pricing at the BBB rating level,'' S&P
analyst Paul Draffin said.
Excluding the potential impact of the draft UBA pricing,
S&P was forecasting Chorus' funds from operations to debt
to remain more than 20% in the next two years, well above
expectations for the BBB rating of more than 15%, he said.
The Moody's review affects $US2 billion ($NZ2.44 billion) of
debt. The regulator on Monday released a draft determination
that would cut the price of Chorus' basic service relating to
the unbundled local copper loop (UCLL) component of its
unbundled bitstream access (UBA) to $8.93 per line a month
from December 2014 from $21.46.
''There is no doubt in my mind that the Government will step
in on the issue. The Government has a mandate to roll-out
ultra-fast broadband through fibre. But by cutting the price
of copper, there is now a mixed message that will slow the
take-up of fibre. The Government will have a say and I
suspect the issue won't go on long,'' Mr Timms said.
Chorus said that would slash as much as 40%, or $160 million
a year, from operating earnings while changes to wholesale
pricing for UCLL would have a $20 million earnings impact.
If implemented as proposed, the pricing cut was likely to
have a material impact on Chorus' credit profile and be
inconsistent with a Baa2 profile, Maurice O'Connell, a
Moody's analyst, said. It would ''exacerbate'' Chorus'
negative free cashflow position and lead to materially
elevated leverage, putting significant pressure on the
company's key financial metrics.
The Baa2 rating was the second-lowest investment grade level
issued by Moody's Investors Service. If Chorus's credit
rating fell below investment grade while debt was still owed
Crown Fibre Holdings for the government-sponsored fibre
network build, the network company was banned from paying
dividends without CFH's approval.
Mr Timms believed Chorus was blindsided by the commission
announcement but he criticised the company for not rejecting
the recommendations more forcefully.
He pointed to the example set by infrastructure and
electricity company Vector whose chairman Michael Stiassny
was more outspoken when faced with regulatory authorities
trying to impose their will on the listed company.
''I suspect this is all new for Chorus but their response was
The way the commission's announcement also caused concern for
investors, and it was no wonder investors got annoyed with
''Investors buy a share one day at $3.40, the commission
issues a draft decision and the share price falls by 50c.
"What sort of encouragement is that for people to invest."
The share price was likely to remain around the $2.95 mark
until the uncertainty was settled, Mr Timms said.
Yesterday, Chorus closed at $2.78.
The draft determination process
• The Commerce Commission started with a list of 31 countries
but removed the United States because of the largely
unregulated approach to wholesale bitstream pricing.
• Of the remaining countries, the primary source of
information was a questionnaire that was sent to regulators
in various countries.
• Nineteen of the 30 benchmark countries were eliminated from
consideration as they did not regulate a wholesale bitstream
access price using a cost-based approach. Only three
countries remained after applying all four criteria -
Belgium, Denmark and Sweden.
• When the configuration of the network was also taken into
account, Belgium was removed leaving just Denmark and Sweden.
• The $8.93 is the mean of the $10.51 (Denmark) and $7.36
(Sweden) assessed monthly cost of UBA (unbundled bitstream
access) in those countries.