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S&P retains negative creditwatch on Telecom


Tuesday 23rd August 2011

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Telecom is facing a likely downgrade in its long-term credit rating, says ratings service Standard and Poor's.

The international agency said today it had maintained its "A" long-term and "A-1"' short-term ratings on Telecom, which was placed on "credit watch with negative implications" on August 4.

"There is a high likelihood that Telecom will complete the proposed demerger of its Chorus access network business and related infrastructure," Standard and Poor's said today in an update of that credit watch.

Telecom plans to demerge Chorus by the end of calendar year 2011, with the proposal subject to shareholder and various other approvals.

"We believe this demerger will weaken Telecom's strong business risk profile," Standard and Poor's credit analyst Paul Draffin said.

"If shareholders approve the demerger, it will likely result, all things being equal, in a lowering of the long-term rating on Telecom by at least one notch."

But a rating of A-minus was possible if Telecom maintained an appropriately conservative capital structure and financial policies following the demerger.

Telecom has publicly stated its intention to target a rating in the "A" category following the demerger, but the final rating would depend on key issues, including:

* Telecom's initial capital structure and financial policy objectives;

* The outlook for revenue and market share for the group's mobile business;

* Revenue and margin expectations for the fixed-line retailing business; and,

* The group's strategy for internet and Australian operations.

-- The two entities resulting from the proposed structural separation of Telecom will use some of the same assets, but no assets will be jointly owned.

Telecom and the Ministry of Economic Development (MED) today published a range of documents with more information on the structure of the telecommunications industry under the proposal.

Subject to shareholder and bondholder approval, Telecom plans to separate networks arm Chorus into a stand-alone business, enabling the "New Chorus" to take part in the Government's ultra-fast broadband (UFB) initiative.

Some Telecom assets -- including more than 270,000 individual fixed assets -- and liabilities will be transferred to New Chorus during the demerger, and the associated commercial sharing arrangements between New Telecom and New Chorus.

Following the demerger, the key assets of New Chorus will include local access fibre, copper and physical infrastructure and buildings in this country, local access electronics and aggregation, and systems for managing wholesale service provider customers.

Telecom's remaining key assets would include service platforms for voice and data applications, the mobile network, the necessary national network with physical sites to accommodate service platforms and connect together to provide end to end services, sales and distribution channels and brand, and investment in overseas assets, and a 50 percent stake in the Southern Cross Cable.

Though there will be no joint ownership of any assets, certain assets would be used by both companies.

Telecom has said that the structural separation will mark a fundamental shift to the industry structure.

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