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Chorus credit rating may be cut

Tuesday 4 Dec 2012 9:41 a.m.

Chorus chief executive Mark Ratcliffe

Chorus chief executive Mark Ratcliffe

Chorus's Baa2 credit rating may be cut by Moody's Investors Service after the Commerce Commission released a draft plan to curb prices the company can charge retailers to access its network.

The credit rating agency is reviewing the rating on US$2 billion ($2.4b) of debt for possible downgrade.

The commission on Monday released a draft determination that would cut the price of Chorus's basic service relating to the unbundled local copper loop (UCLL) component of its unbundled bitstream access (UBA) to $8.93 per line a month from December 2014 from $21.46.

Chorus has said this will slash as much as 40 percent, or $160 million a year, from pretax earnings while changes to wholesale pricing for UCLL would have a $20m earnings impact.

If implemented as proposed, the pricing cut is "likely to have a material impact on Chorus's credit profile and be inconsistent with a Baa2 profile", said Maurice O'Connell, a Moody's analyst.

It would "exacerbate Chorus's negative free cashflow position and lead to materially elevated leverage".

The Baa2 rating is the second-lowest investment grade level issued by Moody's Investors Service. If Chorus's credit rating falls below investment grade while debt is still owed Crown Fibre Holdings for the government-sponsored fibre network build, the network company is banned from paying dividends without CFH's approval.

Shares of Chorus tumbled 14 percent to $2.91 after the commission's announcement.

The draft determination isn't a done deal yet. Prime Minister John Key described the move as "very problematic" and Communications Minister Amy Adams has referred it to her officials to assess the pricing impact, saying a pricing methodology appropriate to New Zealand had to be found.

Among Chorus's concerns is the potential for much lower copper network pricing to deter investment and uptake of ultra-fast broadband, using the government-subsidised fibre network being laid throughout the country.

NZN

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