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Telecom faces rating downgrade

Friday 27th May 2011

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Telecom faces a one to two notch credit rating downgrade from Standard & Poor's when it separates the network arm from the rest of its business.

S&P today maintained its A long-term rating on the company and kept it on creditwatch with negative implications, where it was placed on August 4.

The credit rating company is concerned that the split of Telecom's network business, Chorus, from the rest of its business will weaken it.

"If shareholders approve the de-merger of Chorus into a new standalone company, it will likely result, all things being equal, in a lowering of long-term rating on Telecom by one or two notches," S&P said.

Telecom this week reached agreement with the Government's Crown Fibre Holdings Ltd for Chorus to build and own at least 70% of the proposed ultrafast broadband (UFB) network in New Zealand.

Crown Fibre is a government-owned entity facilitating the UFB process, and Telecom has to separate its network business to get the work.

"In our view, this de-merger, which is considered increasingly likely but remains subject to shareholder and legislative approval, will weaken Telecom's strong business risk profile," S&P credit analyst Paul Draffin said.

The final rating outcome will depend on details of contracts and funding and Telecom's strategy regarding its ancillary businesses.



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