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Rating Action:

MOODY'S UPGRADES C&W OPTUS TO Baa1

11 Feb 2000
MOODY'S UPGRADES C&W OPTUS TO Baa1 Moody's Investors Service today upgraded the senior unsecured rating of Cable & Wireless Optus Finance Pty Limited (CWOF), guaranteed by Cable & Wireless Optus Limited (C&W Optus), to Baa1 from Baa2. This concludes the review for possible upgrade commenced on August 11 1999. The Prime-2 rating of CWOF was not affected by the review. The ratings action reflects the progress that C&W Optus has made in developing its portfolio of services, while maintaining a financial risk appropriate for its rating level.


The ratings reflect: C&W Optus' position in the Australian telecommunications industry, which provides a healthy degree of predictability in future revenue streams given strong industry growth prospects; and its commitment to maintaining a moderate level of leverage with a ratio of debt to capitalisation below 40%. The ratings also recognise that C&W Optus is a 52.5% owned and controlled subsidiary of Cable and Wireless plc ("C&W", rated A3 on a senior unsecured basis, currently under review for possible upgrade), with managerial, capital, and technical support flowing from the relationship.


The rating also considers the risks associated with operating in a regulatory climate that fosters greater competition, C&W Optus' continued high capital expenditure programme, and the challenges in managing technological developments characterising the telecommunications industry. The Australian telecommunications market is now relatively deregulated, and emerging competition has affected the growth of C&W Optus' domestic long distance and international long distance revenues.


Mobile communications continues to be an area of strong growth for C&W Optus enhancing ongoing revenue prospects. Mobile customers totalled 2.4 million as at 31 December 1999, representing a market share of 32.5%. Australian cellular penetration was 40% at 31 December 1999, up from 36% at 30 September 1999. The challenge for C&W Optus will be to maintain not only its market share but to restrict precipitous drops in average revenue per user (ARPU). The increasing number of prepaid subscribers, and the drive by new network operators to migrate their existing resell customers, may place downward pressure on ARPU's, although increased usage of value-added services and data traffic may stem this pressure. C&W Optus has initiated a number of programmes designed to stimulate traffic within its mobile network, reducing the impact of interconnect costs. Margins could be pressured by increased competition over the next 12-18 months, as a number of resellers are currently constructing wireless networks.


C&W Optus' local telephony strategy revolves around increasing subscribers on its hybrid fibre co-axial (HFC) network together with the resale of Telstra calls. The company had 239,000 connected local call subscribers on its network as at 30 September 1999, and also had 433,000 resale customers. Local telephony now accounts for 7% of C&W Optus' revenue, compared to 1% a year earlier. There has been increased competition for local call resale customers following Telstra's lowering of interconnect charges. Moody's notes that competition is intensifying and could hinder C&W Optus' growth. The company will focus on cross-selling local telephony, long distance, pay TV, and Internet access over its network, based on its belief that product packaging will facilitate sales and improve customer retention. Moody's believes that C&W Optus' HFC network positions the company well to benefit from increased demand for bandwidth from retail customers.


The data transmission market will be an important driver of C&W Optus' revenue in the future. The company has experienced success to-date in penetrating the medium to large size corporate market. This segment now accounts for 36% of C&W Optus' revenue base, with sales growing at over 20% per annum. The recent acquisition of AAPT Limited by Telecom New Zealand raises the spectre of a more robust competitor in the business market segment.


C&W Optus' strategy assumes a degree of migration to its HFC network of long-distance and mobile/land traffic currently carried by Telstra. The company's operating margins will benefit from increased traffic volumes and a higher percentage of the traffic on-network given that payments to other carriers currently represent 43% of operating costs. Moody's notes that recent reductions in interconnect charges for accessing Telstra's network may not have a significant impact on operating margins given that charges are falling as more service providers enter the local call resale market.


The debt-to-capitalisation ratio was 26% as at 30 September 1999, and will increase as C&W Optus' capital expenditure programme continues. C&W Optus' has a targeted debt-to-capitalisation ratio of less than 40%. C&W Optus' debt to EBITDA ratio was 1.5 times based on trading for the six months to 30 September 1999, with gross debt of $1.71 billion and EBITDA of A$558 million (A$452 million, six months to 30 September 1998). Capex for the period, however, was over A$700 million (annualised A$1.4 billion), and may continue at or above this level for the next 24 months as the company expands its coverage and its wireless capacity. A significant portion of the programme is revenue driven and will depend on subscriber growth. Moody's expects that by this time cash flow will be sufficient to cover ongoing capex.


C&W Optus and its key operating subsidiaries, currently representing more than 95% of group assets, will guarantee the debt programmes of CWOF. The various bond indentures provide a put option for investors in certain circumstances should C&W reduce its holding below 40%. Programme indentures also covenant that secured liabilities of the C&W Optus Group shall not exceed 10% of total tangible assets (including licences) at any time.


Cable & Wireless Optus Pty Limited, headquartered in Sydney, Australia, is a facilities based telecommunications company 52.5% owned by Cable & Wireless plc. It had consolidated sales in the six months ended 30 September 1999 of A$1.92 billion (US$1.22 billion).

No Related Data.
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