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Telecom may have its credit rating cut as the company faces a recession and falling profit margins, Moody's Investors Service said.
"The rating action reflects Moody's expectation of ongoing challenges ahead for the company's core businesses amid heightened recessionary conditions in New Zealand as well as a material weakening in financial metrics over a period of time, relative to its major peers," the ratings agency said in a report.
Telecom is cutting prices and building new networks to arrest a slide in profits after the Government ordered it to open its lines to rivals and regulated prices.
Telecom had experienced a "significant erosion in its margins and under current recessionary conditions Moody's believe this situation will not be easily reversed", the report said.
Debt might rise as the company funded its capital plans and maintained a high dividend, it said.
Telecom has an A2 long-term rating, which is five notches above junk. The review would focus on Telecom's ability to maintain earnings and cash flow, its capital spending programme and strategies in a challenging environment, Moody's said.
Forsyth Barr analyst Guy Hallwright said a credit downgrade impacted on the cost of new debt.
"But Telecom of course has basically done all its refinancing recently so it's likely to have very little impact unless it remains there or slips further, which would mean that the company was doing worse," Hallwright said.
The debt rating was not that material to an equity investor unless it started to slip to dangerous levels.
"It's unclear why exactly they've decided that they ought to downgrade them now, I mean there's not really any new news out there that hasn't been out there for a year or so."
Telecom spokesman Mark Watts said the NZX-listed company was not surprised.
"To some of the points made by Moody's we absolutely understand the importance of executing against the strategy we've set ourselves," he said. "And that's the number one focus."
- additional reporting Bloomberg
