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Telecom NZ credit rating cut to A- by S&P on Chorus demerger

Monday 14th November 2011

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Telecom Corp.’s long-term credit rating was cut one notch by Standard & Poor’s to reflect the demerger of the company’s Chorus business and the loss of its network revenues.

The rating was lowered to A- from A and the short-term rating to A-2 from A-1, with a stable outlook, S&P said in a statement. The ratings company first flagged the likely cut in August.

“The downgrade reflects TCNZ’s reduced revenue diversity and loss of high-credit-quality access network revenues due to the demerger of Chorus,” S&P said. “Tempering the loss of these network revenue’s is TCNZ’s adoption of a more conservative financial policy framework.”

Telecom has approval from shareholders and court sign off on the split, which is scheduled to be completed in December. The phone company offered to carve itself up in a bid to shed regulatory burdens and tap tax-payer funding to build the majority of a nationwide broadband network.

Shares of Telecom rose 0.7 percent to $2.715 and have climbed by about 25 percent in the past 12 months. The stock is rated ‘outperform’ based on the consensus of nine recommendations compiled by Reuters.

Analysts have said so-called New Telecom could be a takeover target, with no cornerstone shareholder. Both the companies will trade separately on the NZX.

S&P said network revenue and Telecom’s integrated business model were “key credit strengths”, with the network accounting for about a third of de-merger earnings. Telecom’s business risk profile was adjusted down to ‘satisfactory’ from ‘strong’ as a result, it said.

Telecom will retain its mobile business, the second-largest in New Zealand after Vodafone’s, and S&P said the company’s market share and 3G network should allow it “modestly grow” its revenue share though with third rival 2Degrees competing for sales, near-term margin growth is likely to be constrained.


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