MOODY'S DOWNGRADES TELECOM NEW ZEALAND'S DEBT RATINGS - SENIOR UNSECURED TO A1, SENIOR SUBORDINATED TO A2; OUTLOOK STABLE
Sydney, December 17, 1999 -- Moody's Investors Service today downgraded Telecom Corporation of New Zealand Limited's ("TCNZ"), and its supported subsidiaries', senior unsecured ratings to A1 from Aa2 and its subordinated ratings to A2 from Aa3. This concludes the review for possible downgrade initiated on August 18, 1999. The commercial paper ratings of Prime-1 for TCNZ was not covered by this review. The ratings outlook is stable.
The ratings downgraded are:
Telecom Corporation of New Zealand Limited - issuer rating to A1 from Aa2
Telecom Corporation of New Zealand Limited - senior unsecured rating to A1 from Aa2
TCNZ Finance Limited (backed) - senior unsecured rating to A1 from Aa2
TCNZ Finance Limited (backed) - subordinated rating to A2 from Aa3
Telecom Corp. New Zealand O/S Finance Ltd. (backed) - senior unsecured domestic currency rating to A1 from Aa2
Telecom New Zealand Finance Limited (backed) - subordinated rating to A2 from Aa3
The downgrade considers the adverse changes in TCNZ's risk profile following the acquisition of a 78.2% stake in AAPT Limited (AAPT), an Australian telecommunications company. Moody's recognises that TCNZ, with its strong stable cash flows, can provide the support, if required, to expand and develop AAPT's assets. AAPT provides TCNZ with a platform for regional expansion, improving the potential to accelerate its revenue growth and create additional value for Trans-Tasman wireless and business services. Moody's notes, however, that TCNZ's operating risk is heightened in the short term as AAPT executes its business plan.
TCNZ primarily funded the NZ$1.56 billion acquisition through the drawdown of short term facilities. During the same period marketable securities have been realised, reducing the net increase in gross debt to approximately NZ$1.3 billion. Moody's expects TCNZ to replace the short-term debt with longer-term debt or debt-like instruments, thus carrying this higher debt burden for some time. The additional debt has significantly affected TCNZ's financial profile, with debt coverages weakening. Moody's expects that the combined EBITDA margin could be up to 15% lower than TCNZ's 1998/99 margin of 58%.
TCNZ has had, in recent years, a relatively weak coverage of retained cash flow (RCF) to debt (22% 1999) due to the high level of dividend payments. TCNZ has solid capex requirements in the next three years, which will negate the ability of the company to meaningfully reduce debt from RCF. Moody's considers that the capital notes in TCNZ's capital structure are debt-like and have been treated accordingly. The company appears likely to maintain dividend payments at, or about, their current level and does not intend, at present, to issue equity in order to alleviate financial leverage. This indicates that TCNZ is prepared to undertake greater risk in order to maintain equity-holder returns.
AAPT is the third largest telecommunications company in Australia, although its current market share is less than 5%. The company has developed niche markets in business services and resale of long distance and wireless. AAPT has been allocated wireless and LMDS spectrum and intends to build networks to utilise these assets. Moody's expects that AAPT will require significant capex over the next three years to cover the build-out of its networks. Additional capital will be required at AAPT given that operating cash flow will be insufficient to cover capex in this period. Moody's is concerned that a significant portion of this capital will be in the form of debt.
Despite the impact of the AAPT transaction, Moody's believes that TCNZ will continue to maintain a commanding position in its home market, and will continue to generate strong and predictable cash flows with a high quality network and a dynamic management team. The company has successfully transitioned its revenue base, taking advantage of growth in mobile (New Zealand penetration 27%, with expectations of 30% in the year 2000) and data services to more than offset falls in long distance revenues. Moody's noted that TCNZ had been successful in growing its revenue base during a period of significant downturn in the New Zealand economy. The successful deployment of the Southern Cross cable across the Pacific (50% owned by TCNZ) will enhance TCNZ's revenue base. The company is continually examining ways of reducing costs by outsourcing and is developing strategic alliances to improve its applications and content capabilities.
The stable outlook is predicated on Moody's expectation that management will be able to execute its current business plan, and that this plan provides flexibility for the company to adopt and innovate.
Telecom Corporation of New Zealand Limited, headquartered in Wellington, New Zealand, provides telecommunications services in New Zealand and Australia.
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