Chorus debt rating on review for possible cut following regulator’s draft price controls
Dec. 4 (BusinessDesk) - Chorus's Baa2 credit rating may be cut by Moody’s Investors Service after the Commerce
Commission released a draft plan to curb prices the company can charge retailers to access its network.
The review affects US$2 billion of debt. The regulator yesterday released a draft determination that would cut the price
of Chorus’s 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.
Chorus has said this will slash as much as 40 percent, or $160 million a year, from pretax earnings while changes to
wholesale pricing for UCLL would have a $20 million earnings impact.
If implemented as proposed, the pricing cut is “likely to have a material impact on Chorus’s credit profile and be
inconsistent with a Baa2 profile,” said Maurice O’Connell, a Moody’s analyst. It would “exacerbate Chorus’s negative
free cashflow position and lead to materially elevated leverage, putting significant pressure on the company’s key
financial metrics.”
The Baa2 rating is the second-lowest investment grade level issued by Moody's Investors Service. If Chorus's credit
rating falls below investment grade while debt is still owed Crown Fibre Holdings for the government-sponsored fibre
network build, the network company is banned from paying dividends without CFH's approval.
Shares of Chorus tumbled 14 percent to $2.91 after the commission’s announcement yesterday, 3 cents lower than its
listing price last year.
The draft determination isn’t a done deal yet. Prime Minister John Key described the move as "very problematic" and
Communications Minister Amy Adams has referred it to her officials to assess the pricing impact, saying a pricing
methodology appropriate to New Zealand had to be found.
Among Chorus’s concerns is the potential for much lower copper network pricing to deter investment and uptake of
ultra-fast broadband, using the government-subsidised fibre network being laid throughout the country.
Chorus was spun-out from Telecom as a separately-listed company last year to free up the telecommunications company from
its regulatory burden and allow the network operator to successfully win a billion dollar subsidy to build a nationwide
fibre network and rural broadband system.
Some 80 percent of the network company’s revenue is still derived from the ageing copper network, and is subject to the
Commerce Commission’s pricing review.
At a media briefing in Wellington, Telecommunications Commissioner Stephen Gale today stressed the UBA pricing regime
was a draft decision and would go out to industry for consultation with a view to making a final ruling in June.
The UCLL service lets telecommunication companies use the copper network between an exchange and an end-user’s premises
to offer their own voice and broadband services. UBA gives access to Chorus’s electronics, software and transport over
the network, meaning telcos don’t have to build their own.
(BusinessDesk)