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Rating Action:

MOODY'S DOWNGRADES TCNZ SENIOR UNSECURED RATINGS TO A2; OUTLOOK NEGATIVE

17 Jun 2002
MOODY'S DOWNGRADES TCNZ SENIOR UNSECURED RATINGS TO A2; OUTLOOK NEGATIVE

Approximately NZ$3.3 Billion of Debt Securities Affected.

Sydney, June 17, 2002 -- Moody's Investors Service today downgraded Telecom Corporation of New Zealand Limited's ("TCNZ"), and its supported subsidiaries', senior unsecured ratings to A2 from A1 and its subordinated ratings to A3 from A2. This concludes the review for possible downgrade initiated on February 20, 2002. The revised ratings reflect TCNZ's ongoing strong leading position in its home market balanced against the continued under-performance of its Australian operations. As a result financial measures of creditworthiness remain weak at the A2 level and improvements are dependent on planned debt reduction in the next two years. The ratings outlook is negative reflecting the challenges TCNZ faces in successfully implementing its business plan for its Australian operations.

The ratings downgraded are:

Telecom Corporation of New Zealand Limited - issuer rating to A2 from A1

Telecom Corporation of New Zealand Limited - senior unsecured rating to A2 from A1

TCNZ Finance Ltd. (backed) - senior unsecured rating to A2 from A1

TCNZ Finance Ltd. (backed) - subordinated rating to A3 from A2

Telecom New Zealand Finance Limited (backed) - subordinated rating to A3 from A2

The commercial paper ratings of Prime-1 for TCNZ were not covered by this review

Moody's believe that recent industry developments in New Zealand will support TCNZ's profitability in that market where it continues to maintain a strong leading position, generating healthy and predictable cash flows. The company has strong brand recognition and a modern network; with an ability to launch bundled products and enhance per customer revenue. Further, the competitive position in New Zealand is becoming more settled which is likely in turn to lead to the industry as a whole becoming more profitable. In the last financial year Telstra Saturn acquired BT Clear in New Zealand to form Telstra Clear, and is now the only major competitor to TCNZ in the fixed line market, with a share of approximately 10%. In the cellular market Vodafone is the only other major player with a share of around 45%. Both of these companies in recent times have displayed a rationale approach to their marketing efforts, with profitability appearing to be a key objective. Finally, the evolving regulatory environment, while potentially less favourable to TCNZ, does appear to be more certain from an outcomes perspective. The combination of these factors augur well for a more stable New Zealand operating environment, underpinning the certainty of TCNZ's cash flows from that market.

Against the background of TCNZ's strong domestic position, its Australian investments have been more problematic. AAPT continues to generate low operating margins with expectations of only gradual improvements in the medium term, given there is no clear indication of a significant step-change breakthrough. The success of the Australian operations, however, is important to TCNZ's evolving credit profile, given it is the most likely source of incremental free cash flow.

Moody's acknowledges the company has undertaken various initiatives to improve its Australian operating performance. It is focussed on driving value out of capital invested by carrying more of its own traffic, differentiating its products from the competition, and seeking price increases wherever the market will allow. Progress has already been made, but Moody's remains cautious, particularly about the ability to achieve margin growth in the highly competitive business and SME markets. Results from the last five months have been encouraging and supportive of management's business plan.

TCNZ has for some time displayed lower quantitative financial measurements of credit compared to similarly rated telecommunication companies worldwide. This has traditionally been mitigated to a degree by the stability of its domestic revenue base and operating margins. This problem, however, has been exacerbated by the cost of the AAPT acquisition and the ongoing poor returns from that business. TCNZ has partly addressed this issue by reducing dividend payments and initiating reductions in capital expenditure and operating expenditure. In addition free cash flow in the coming years will be used to reduce debt. Moody's notes, however, that more appropriate financial measurements of credit for TCNZ's current business profile would be EBITDA to gross interest coverage of around 5.5-6 times, retained cash flow to debt coverage of approximately 30%, and an EBITDA margin of greater than 40%. The rating anticipates such targets to be achieved by 2003 but the negative outlook acknowledges the challenges facing TCNZ to achieve this, particularly given the difficult trading conditions in Australia.

In recent years TCNZ's financial risk associated with high leverage has been accentuated by high levels of short term debt. The company has reduced its exposure to the short-term market, although outstandings are expected to remain around NZ$500-NZ$700 million, and the refinancing risk is accentuated by maturing long term debt. Maturing debt in the next FY totals almost NZ$600 million. TCNZ has a policy of maintaining committed standby facilities to at least 100% of the forward 12-month net funding requirement. The company currently has backup lines totalling NZ$825 million comprising a US$200 million 3 year facility (due 9/03) and a US$200 million 3 year facility (due 8/04), which have multi-time zone availability. Both facilities are readily accessible with no MAC clauses or rating triggers.

Telecom Corporation of New Zealand Limited, headquartered in Wellington, New Zealand, provides telecommunications services in New Zealand and Australia.

Sydney
Brian Cahill
Managing Director
International Group
Moody's Investors Service Pty Ltd
612 9270 8100

Sydney
Charles F. Macgregor
VP - Senior Credit Officer
International Group
Moody's Investors Service Pty Ltd
612 9270 8100

No Related Data.
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