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Rating Action:

Moody's downgrades ERC Ireland Finance (parent of eircom) to B2; negative outlook

27 May 2010

Madrid, May 27, 2010 -- Moody's Investors Service today downgraded to B2 from B1 the corporate family rating (CFR) and probability of default rating (PDR) of ERC Ireland Finance Ltd ("ERCIF"), an indirect parent company of eircom Group Ltd ("eircom"). At the same time, Moody's downgraded to Caa1 from B3 the rating of ERCIF's EUR350 million senior unsecured notes due 2016 and the rating of the EUR350 million second-lien term loan of ERC Ireland Holdings Ltd ("ERCIH"). The rating of ERCIH's EUR3.3 billion senior secured facility was downgraded to B1 from Ba3.

These rating actions conclude the review for possible downgrade, which was initiated on 20 April 2009. The outlook on the ratings is negative.

Today's downgrade reflects Moody's concerns about the combination of (i) lack of meaningful deleveraging as a result of a weakening operating performance; and (ii) uncertainties regarding the overall strategic direction of the company and its long-term capital structure.

eircom's weakening operating performance trends highlight the impact of the adverse macroeconomic environment in Ireland, as well as increasing competitive and regulatory pressures. As a result of this weak operating performance, Moody's believes that there will be no meaningful deleveraging of the company´s financial profile with respect to its original expectations, which were factored into the previous rating. Moody´s expects that, in the absence of other measures, the company´s adjusted leverage will remain around 6.0x in FY2010 and FY2011.

While eircom generates positive free cash flow of around EUR50 million per annum, Moody´s notes that this has been primarily driven by drastic reductions in opex and capex, rather than improvements in the top line. In Moody´s view, sustained opex and capex cuts could lead to long-term loss in competitiveness, as eircom competes with stronger and better capitalised players such as Vodafone or Telefonica O2.

As a result of the lack of meaningful deleveraging, Moody´s believes that eircom will face increasing challenges in complying with financial covenants in its facilities documentation in the short term, because of the covenant step downs in 2010. If this occurs, eircom may require an equity injection to rebalance its capital structure but the company´s strategic shareholder, STT Communications, has not yet given any indication of its intentions regarding eircom´s longer term capital structure.

Absent a potential covenant breach, eircom has no liquidity pressure in the near term. As of 31 March 2010, eircom had EUR265 million in cash and EUR123 million available under its revolving credit facility. Debt maturities over the next 12 months are limited to EUR44 million and eircom does not pay dividends. The bulk of the maturities is due between 2014 and 2017 for which refinancing will be needed.

The negative outlook on the ratings therefore mainly reflects Moody´s expectation that the company will operate in the near term with reduced headroom under financial covenants. Further downward pressure on the rating could materialise in the absence of a recovery in operating performance trends resulting in increased tightening of headroom under financial covenants.

Moody´s believes that in the absence of pressure on financial covenants, eircom would be well positioned in the B2 rating category with the current leverage metrics and deleveraging prospects.

The ratings affected by today's rating action are as follows:

- ERCIF's CFR and PDR: downgraded to B2 from B1

- ERCIF's EUR350 million senior unsecured floating rate notes due 2016: downgraded to Caa1 from B3

- ERCIH's EUR3.3 billion senior secured bank credit facilities: downgraded to B1 from Ba3

- ERCIH's EUR350 million second-lien loan due 2016: downgraded to Caa1 from B3

The last rating action was implemented on 20 April 2009, when Moody's placed the ratings of ERC Ireland Finance Ltd and related rated entities on review for possible downgrade.

The principal methodology used in rating ERC Ireland Finance Ltd and related rated entities was Moody's Global Telecoms Industry Methodology, published in December 2007 and available on www.moodys.com in the Rating Methodologies sub-directory, under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

ERC Ireland Finance Ltd (previously known as BCM Ireland Finance Ltd) and ERC Ireland Holdings Ltd (previously known as BCM Ireland Holdings Ltd) are holding companies 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 last 12 months ended 31 March 2010, eircom generated revenues of EUR1,867 million and EBITDA of EUR679 million.

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

London
Paloma San Valentin
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades ERC Ireland Finance (parent of eircom) to B2; negative outlook
No Related Data.
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