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Rating Action:

Moody's downgrades BCM Ireland Finance (parent of Eircom) CFR to B1

20 Mar 2007
Moody's downgrades BCM Ireland Finance (parent of Eircom) CFR to B1

Madrid, March 20, 2007 -- Moody's Investors Service today downgraded the Corporate Family Rating ("CFR") of BCM Ireland Finance Ltd ("BCMIF"), an indirect parent company of eircom Group plc, to B1 from Ba3. Moody's also downgraded the rating of BCMIF's EUR350 million senior unsecured notes due 2016 to B3 from B2 and the rating of the EUR350 million second-lien term loan of BCM Ireland Holdings Ltd ("BCMIH") to B3 from B2. The rating of BCMIH's EUR3.3 billion senior secured facility was confirmed at Ba3. These rating actions conclude the review for possible downgrade initiated on 15 November 2006 following the announcement that the company was planning to issue EUR425 million in paid-in-kind ("PIK") notes. The outlook on the ratings is stable.

Concurrently, Moody's assigned the following ratings in the context of the implementation of its Loss Given Default ("LGD") methodology for European corporates from 19 March 2007:

BCM Ireland Finance Ltd:

- Probability of default rating: B1

- EUR350 million senior unsecured notes due 2016: LGD 6, 93%

BCM Ireland Holdings Ltd:

- EUR3.3 billion senior secured facility: LGD 3, 39%

- EUR350 million second-lien term loan: LGD 5, 87%

Today's downgrade reflects the slower pace of improvement in the company's credit metrics as a result of the more ambitious capex plan it recently announced and the more aggressive financial policies being implemented than had originally been anticipated at the time of the assignment of the Ba3 CFR, as reflected by the issuance of the PIK notes as part of an early distribution of capital to shareholders in the form of a holding company dividend. Moody's notes that the company was already weakly positioned in its rating category following the refinancing of its capital structure in August 2006 (see press release dated 3 August 2006).

The company has announced a more aggressive capex plan of up to EUR250 million over the next three years in support of a variety of initiatives, including improved IT infrastructure, enhanced broadband services, the development of a Next Generation core IP network as well as the rollout of fibre to the curb (FTTC). Mobile services are also scheduled to receive part of this investment, providing accelerated enhancements to the network, further investments in order to reach network parity, and the development of the fourth 3G licence, which was finally issued to eircom in February 2007. In Moody's opinion, this additional capex plan will slow the de-leveraging profile that we expected at the time of the initial rating assignment and the rating agency now expects that the company's Debt / EBITDA (as adjusted by Moody's and excluding the PIK notes) will not fall below 6x until 2009.

Moody's is continuing to assign the CFR to BCMIF (the holding company of the restricted group) given that the PIK obligations (issued by BCM Ireland Preferred Equity Limited, BCIMF's parent) do not have a strict creditor claim on the restricted group and the tight indenture covenant package of the acquisition facilities prevents cash leakage from the restricted group. Therefore, the CFR does not incorporate in its leverage calculations the EUR425 million PIK notes. However, Moody's acknowledges that the PIK notes add complexity to the broader ownership group and limit the potential upward rating pressure over the medium term within the new B1 rating category, given that pressure can develop to refinance within the restricted group once sufficient financial flexibility develops.

The B1 CFR continues to reflect not only the combination of eircom's high leverage and ongoing regulatory and competitive risks in the Irish market, but also the company's dominant position in the Irish fixed-line telecommunications market and the competitive advantage afforded by its significant scale and network reach, the strong operational cash flow provided by eircom's businesses, the current strength of the Irish economy and its favourable demographics.

Negative rating pressure could materialise if there is pressure on operating performance (due to lower revenue growth and/or compression on margins) and/or failure to deliver on the de-leveraging targets with the result that leverage on a Debt/EBITDA basis (as adjusted by Moody's) rises above 7x. Conversely, the ratings could experience upward pressure over the medium term if there is evidence that the capex plan is being successfully executed and is supported by EBITDA growth and de-leveraging on a Debt/EBITDA basis (as adjusted by Moody's) to sustainably below 6x, coupled with evidence that the PIK notes are not intended to be refinanced within the restricted group.

As a result of the implementation of the LGD methodology, Moody's has downgraded to B3 the ratings of the EUR350 million senior unsecured notes due 2016 and the EUR350 million second-lien term loan. However, the rating of the EUR3.3 billion senior secured facility was confirmed at Ba3, reflecting the presence of junior debt in the capital structure, resulting in a one-notch differential between the rating of the senior secured facility and the corporate family rating.

BCM Ireland Finance Limited is a holding company of eircom, the principal provider of fixed-line telecommunications services in Ireland and, following its acquisition of Meteor, the third largest mobile operator in Ireland. In the nine months ending 31 December 2006, eircom generated revenues of EUR1,467 million.

Madrid
Ivan Palacios
Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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