KEY POINTS:
Increased competition, tight regulations and economic problems have seen ratings service Moody's downgrade Telecom's senior and unsecured short term commercial paper ratings.
The ratings have gone from A2/P-1 to A3/P-2. The outlook is stable. Telecom managers will not be surprised by today's downgrade. Its chief financial officer Russ Houlden said earlier this week that companies put on review by Moody's usually had their ratings cut.
Today's move reflected ongoing pressure on Telecom and Moody's expected it would continue given challenging operating conditions, said a Moody's vice president and senior analyst, Ian Lewis.
Telecom faced the combined effects of increased competition, tighter regulatory requirements and weak economic conditions, he said.
"Compared with its major rated global telco peers which have greater scale, better profitability and, at this time, more developed product technology, Telecom is better positioned at the A3 level."
Lewis said Moody's also expected Telecom's capital transformation programme, started in April 2008, as well as a continuation of high dividends, would lead to negative free cash flow and rising debt over at least the next one to two years.
The outlook is stable, reflecting a degree of flexibility to withstand increased operating and/or financial pressures, within the A3 rating.
Given the risk associated with Telecom's transformation plan as it seeks to move to a next-generation telco business model, Moody's did not anticipate upward rating pressure would be a factor for the ratings in the medium term until the transformation programme was completed, said Lewis.
On the other hand further downward rating pressure might occur should Telecom experience harsher than expected regulatory outcomes, lower returns or the full or partial failure of its current capital expenditure/transformation programme.
Telecom chief financial officer Russ Houlden discussed the prospects of a Moody's downgrade at the company's second quarter financial results this week.
He said that the Standard and Poor's 'stable A' rating was appropriate for the company.
"In terms of Moody's, they apply different criteria from Standard & Poor's, so it's possible that they'll move to a lower rating, they've put us on review for a possible downgrade - when they do that, the normal outlook is that they do downgrade, " he said.
"So it would not be a surprise to us at all if we were to be downgraded, but I would say that if that were to happen, it would not be because of these quarter 2 results, it would be because of the criteria and what they've been thinking for the last 3 or six months."
He outlined what he said was "actually a number of good reasons in here for them to maintain their rating."
This included a lot of management plans being well on track and what was looking to be a "benign economic impact" of the current downturn on Telecom's business.
- NZPA/CHRIS DANIELS
