Agencies put Chorus on credit watch

Chorus received a double blow yesterday when rating agencies started taking an interest on the infrastructure company's credit rating.

Moody's placed Chorus' credit rating on review for a possible downgrade and Standard and Poor's placed the company on CreditWatch Negative - both actions following the decision on Tuesday by the Commerce Commission.

On Tuesday, the Commerce Commission released its final determination for access to the Chorus copper network, cutting about 50% of the current access price.

Chorus said the lower price could wipe up to $142 million off its operating profit for the 2015 financial year, threatening the company's agreement with the Government to introduce the ultra-fast broadband network (UFB).

Craigs Investment Partners broker Chris Timms said a credit rating downgrade was potentially crippling for the company.

The interest rates it paid to borrow money would rise, putting more pressure on the company.

''This means a higher level of interest and may reflect the ability of the company to even borrow money. It could be crippling for Chorus as any increased costs goes straight to the profit and loss line and hits investors in the company.''

Moody's vice-president and senior analyst Maurice O'Connell said in a statement the rating action followed the release of the Commerce Commission's final decision on unbundled bitstream access (UBA).

The potential lowering of the Chorus profit by $142 million represented a fall of about 20%.

''This would represent a significantly weaker position relative to rating expectation. The outcome of the rating review would depend on what measures, if any, Chorus would implement to counter the negative financial impact of the decision.''

The existing Baa2 rating for Chorus took into account Moody's current expectation for gradually increasing debt and negative free cash flow until around 2019, due to the company's substantial capital expenditure plan, he said.

The commission determination would exacerbate Chorus' negative free cash flow position and lead to materially higher debt, putting pressure on the company's key financial measures.

The review would focus on the impact of the commission's decision on Chorus' financial profile and the company's UFB introduction. It would also consider countermeasures Chorus would implement to mitigate the negative impact of the decision, Mr O'Connell said.

Standard and Poor's credit analyst Paul Draffin said the rating agency's forecasts indicated the commission determination, if implemented, would result in Chorus' financial metrics falling outside expectations for the current rating from the year ended June 2015.

''Furthermore, without offsetting credit-supportive actions, the group will likely also breach covenants under its debt facilities from fiscal 2015.''

If the determination was implemented without amendment, and Chorus did not undertake material offsetting credit-supportive actions, it was likely the credit rating would be lowered at least one notch, he said.

The CreditWatch was expected to be revolved within the next three months. By that time, Standard and Poor's expected greater clarity on the Government's reaction to the decision and any response, as well as Chorus' strategies to mitigate the expected credit impact.

''In the event these issues cannot be resolved during this period, we will update the CreditWatch at that time,'' Mr Draffin said.

A Chorus spokesman told the Otago Daily Times the review was ''clearly a concern'' but not unexpected after the commission's announcement.

Mr Timms said Chorus was stuck between ''a rock and a hard place''. Chorus had highlighted risks to its dividend and financial position which is heightened without the level of change that demanded Government intervention.

''This is the key focus point with the Government reviewing its assumptions and impacts on Chorus before deciding the next step. The politicisation of the telco ... remains a concern.''

In hindsight, the Government negotiated too strong a deal with Chorus on UFB without flexibility and regulatory stability, Mr Timms said.

Also, Chorus took on too much debt for the dividend expectations it set.

Chorus was in the middle of peak capital expenditure on UFB but its earnings base remained significant.

Free cash flow was forecast to recover from 2020 and funding terms with the Crown provided some flexibility in debt.

''The board needs to determine risk tolerance in setting dividends through the next three to five years, regardless of Government moves,'' he said.

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