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Telecom placed on credit watch negative

Thursday 5th August 2010

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Telecom has been put on negative creditwatch by Standard & Poor's as question-marks hang over how the phone company would allocate its debt between the two entities if it demerges.

The international credit rating agency flagged as a one-in-two change a downgrade of one or two notches for Telecom's A rating over the next three months. The move follows the national telco's formal offer this week to split into two so that it can participate in the government-backed ultra-fast broadband initiative.  

Credit analyst Paul Draffin said Telecom's demerger announcement boosted the likelihood and speed of the restructuring occurring.  

"You would expect a credit rating agency to say these things and question how they're going to repay debt when there's this much uncertainty in the mix," said Guy Hallwright, analyst at Forsyth Barr.

"Returning the whole of the debt and repaying the issuance may be part of that." 

Telecom went down the path of structural separation earlier this week as it tries to tap the $1.85 billion on offer from the government to roll-out high-speed internet across the entire nation and free itself from some of the cost of existing regulation of its copper-line network.  

As at March 31, the phone company had $206 million of debt due within the year and a further $2.126 billion of debt beyond that timeframe.

It has some $541 million worth of bonds listed on the NZX.

David Speight, director at Direct Broking, said the outlook won't have much impact on Telecom's listed bonds, as retail investors tended to avoid the securities, while institutional investors would already have reacted to the news. 

Outgoing Telecom chief financial officer Russ Houlden said the company was committed to keeping its single A credit ratings with S&P and Moody's Investors Service. In April, Fitch Ratings Agency cut the company's rating to A- from an A.  

The shares fell 0.5% to $2.00 in trading today.

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