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Rating Action:

Moody's downgrades Chorus to Baa3 from Baa2; outlook negative

Global Credit Research - 21 Jan 2014

Approximately USD1.5 billion in debt affected

Sydney, January 21, 2014 -- Moody's Investors Service has today downgraded to Baa3 from Baa2 Chorus Limited's ("Chorus") Baa2 issuer and senior unsecured ratings. Additionally Chorus' (P)Baa2 MTN programme rating has been downgraded to (P)Baa3. This concludes the review initiated on 6 November 2013 following the release of the New Zealand Commerce Commission ("NZCC") final decision on Chorus' unbundled bitstream access ("UBA") price review.

The outlook for the ratings is negative.

RATINGS RATIONALE

"The downgrade to Baa3 reflects the material impact on Chorus' credit profile of NZCC regulatory decisions as well as higher capital expenditure and operating expenses compared to our original expectation", says Maurice O'Connell, a Moody's Vice President and Senior Analyst.

"In particular, the recent NZCC regulatory decision regarding UBA pricing will have an adverse impact on Chorus' financial profile, with annual EBITDA decreasing by around 20% from 2015 absent measures being contemplated by Chorus", added O'Connell. "As a consequence we expect adjusted financial leverage, measured as debt/EBITDA, will likely exceed the tolerance level set for Chorus' Baa2 rating."

Moody's acknowledges Chorus' focus on implementing measures to mitigate the adverse impact of the regulatory decision and which could include the repricing of commercial services, cost cutting and dividend reduction. External actions such as regulatory reviews, legal review of the NZCC decision and negotiations with Crown Fibre Holdings could also further ease the impact of the NZCC decision.

Nevertheless, Moody's expects leverage to increase as the fibre rollout continues with adjusted debt/EBITDA expected to approach 4.5 - 5.0 times within 3-4 years, a level that is considerably higher than Moody's original expectation and no longer consistent with the previous Baa2 rating.

Moody's notes that bank financial covenants would be breached in 2015 in the event Chorus is unable to alleviate the impact of the NZCC decision through some, or a combination of the above actions.

The negative outlook reflects the uncertainty surrounding the countermeasures and their effectiveness in offsetting the impact of the regulatory decision.

The outlook could change to stable if the measures implemented provide sufficient visibility around Chorus' ability to improve its financial profile, such that debt/EBITDA stays below 5.0 times on a consistent basis.

On the other hand, further downward rating pressure could evolve if debt/EBITDA stays above 5.0 times (on an adjusted basis); or FFO+Interest/Interest stays below 2.0 times, on a consistent basis.

The rating could face upward pressure if the regulatory environment became more certain and if adjusted debt/EBITDA drops below 4.0 times on a consistent basis; or FFO+Interest/Interest is above 3.0 times on a consistent basis.

The principal methodology used in this rating was the Global Telecommunications Industry published in December 2010, Global Communications Infrastructure Rating Methodology published in June 2011, and Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Chorus Group is a New Zealand-based telecommunications utility group. It owns copper and fibre optic fixed-line telecommunications networks in New Zealand, together with exchanges, roadside cabinets, and associated infrastructure. It is a wholesaler of access to these networks. Chorus Limited is the parent company, and the issuer. Chorus New Zealand Limited guarantees Chorus Limited, and is the main operational entity in the Chorus Group.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maurice O'Connell
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Terry Fanous
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Releasing Office:
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Moody's downgrades Chorus to Baa3 from Baa2; outlook negative
No Related Data.

 

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