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Rating Action:

Moody's downgrades ERC Ireland Finance (parent of eircom) to B3; negative outlook

Global Credit Research - 02 Sep 2010

Madrid, September 02, 2010 -- Moody's Investors Service has today downgraded to B3 from B2 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 has downgraded the following ratings to Caa2 from Caa1: (i) ERCIF's EUR350 million worth of senior unsecured notes due in 2016; and (ii) 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 B2 from B1. The outlook on the ratings is negative.

RATING RATIONALE

"Today's downgrade reflects Moody's concerns about the likelihood of a covenant breach within the next 12 months, coupled with the lack of clarity regarding the company's plans to resolve the short-term covenant issue and the long-term financial strategy of the company," says Iván Palacios, a Moody's Vice President -- Senior Analyst, and lead analyst for the company.

In its Q4 2009/10 results, eircom acknowledged that it may breach covenants under its existing facilities within the next 12 to 18 months, given that the company has high levels of debt and its covenants tighten over the next few quarters.

In the year ending June 2010, eircom's revenues showed a declining trend. In addition, the company's reported consolidated EBITDA fell by EUR16 million (2.3%), with stability in its fixed-line business offset by a decline in its mobile division.

In Moody's view, the very challenging operating conditions that eircom is facing are unlikely to change in the short term. Despite management's success in reducing eircom's cost base in order to maintain EBITDA in light of declining revenues, and savings in capex to increase free cash flow generation, Moody's believes that the company's EBITDA will continue to decline, which could lead to a covenant breach in the quarter ending June 2011.

The company has appointed financial advisors to assess its options regarding its covenants and long-term financial strategy. These options could include a covenant reset and/or an equity cure. Nevertheless, no timing has been given for the finalisation of these discussions and all options are being considered at this stage. Moody's believes that the prior B2 CFR was inconsistent with the high likelihood of a covenant breach in the short term and the current level of uncertainty regarding the options that eircom is assessing.

Moody's also notes that eircom's strategic shareholders, STT Communications and the ESOT, have not yet given any public indication of their intentions regarding the company's longer-term capital structure or plans to inject equity into the business in order to avoid a covenant breach.

It is Moody's expectation that, in the absence of other capital structure measures, eircom's adjusted leverage will remain around 5.5x in financial year (FY) 2010/11, a similar level as that reported in FY 2009/10. Adjusted leverage excludes the PIK instrument issued by ERC Ireland Preferred Equity Limited ("ERCIPE"), as ERCIPE does 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.

The company's debt instruments, and particularly the EUR350 million worth of floating-rate notes and the second lien facilities, have been trading at significant discounts to par value in the past few months. Moody's notes that any negative implications on the debt-holder's recovery prospects from potential debt-restructuring measures involving a discounted offer on debt components of eircom's capital structure could be considered a distressed exchange and, by implication, a default under Moody's methodologies.

The negative outlook on the ratings mainly reflects the lack of clarity with regard to eircom's long-term capital structure plans and Moody's expectation that, in the short term, the company will operate with reduced headroom under financial covenants. Further downward pressure on the rating could occur as a result of: (i) an absence of a detailed plan to reset covenants or bring additional equity; and/or (ii) indications that eircom might consider a discounted offer on the debt components of its capital structure.

Upward pressure on the rating is unlikely over the short term as a result of the negative outlook. However, the rating outlook could be stabilised if eircom proactively manages the covenant situation while maintaining its current financial profile, with a debt/EBITDA ratio of around 5.5x. Upward pressure could be exerted on the rating over the medium term if the business plan is successfully executed and an equity injection allows eircom to rebalance its capital structure and maintain adequate headroom under financial covenants.

The last rating action on eircom was implemented on 27 May 2010, when Moody's downgraded the CFR and PDR of ERCIF to B2 from B1.

The principal methodologies used in rating ERCIF and ERCIH were the "Global Telecommunications Industry Rating Methodology", published in December 2007, and "Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA", published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

ERCIF (previously known as BCM Ireland Finance Ltd) and ERCIH (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 the country. In the last 12 months ended 30 June 2010, eircom generated revenues of EUR1.82 billion and adjusted EBITDA (as reported by the company) of EUR679 million.

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Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information and confidential and proprietary Moody's Investors Service's information.

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Moody's Investors Service adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from reliable sources; however, Moody's Investors Service does not and cannot in every instance independently verify, audit or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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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
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
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Spain

Moody's downgrades ERC Ireland Finance (parent of eircom) to B3; negative outlook
No Related Data.
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