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Rating Action:

Moody's downgrades ERC Ireland Finance (parent of eircom) to Caa3; negative outlook

22 Dec 2011

Madrid, December 22, 2011 -- Moody's Investors Service has today downgraded to Caa3 from Caa2 the corporate family rating (CFR) of ERC Ireland Finance Ltd ("ERCIF"), an indirect parent company of eircom Group Ltd ("eircom"). Concurrently, Moody's has downgraded ERCIF's probability of default rating (PDR) to Ca from Caa3.

Moody's has also downgraded the following ratings:

(i) ERCIF's EUR350 million worth of senior unsecured notes due in 2016 to C from Ca

(ii) ERC Ireland Holdings Ltd's ("ERCIH") EUR350 million second-lien term loan to C from Ca

(iii) ERCIH's EUR3.3 billion senior secured facility to Caa2 from Caa1

The outlook on the ratings is negative.

RATINGS RATIONALE

"Today's rating action reflects Moody's concerns that the potential recovery prospects for eircom's creditors could be lower than previously anticipated by the rating agency, owing to the continuing macroeconomic weakness in Ireland and the deteriorating outlook for the business," says Iván Palacios, a Moody's Vice President -- Senior Analyst and lead analyst for eircom.

The weak underlying fundamentals of the Irish economy and the low visibility of an economic recovery over the near-to-medium term are affecting consumer confidence, which is translating into a deteriorating operating performance for telecom operators such as eircom. In addition, the company's operating performance is being affected by the intense competition in the market and the impact of regulation. In fact, eircom's estimated results for the month of October 2011 as disclosed publicly by the company show a significant decline in performance compared with the corresponding periods in 2010. Moody's would expect eircom to report a continued decline in EBITDA in the coming 12 months.

"The expectation of lower recoveries for its creditors is exacerbated by the very slow progress that the company and its lenders are making with regard to its balance-sheet remediation plan," explains Mr Palacios. "The delay in concluding this process in the midst of an uncertain economic environment is eroding eircom's credit profile in Moody's opinion, as the visibility of critical decisions about the future strategy of the company is limited pending a final resolution of the restructuring process," adds Mr. Palacios.

Debt restructuring discussions between eircom and its lenders are ongoing, and the company has recently received an extension of the covenant waiver for its breach of the senior debt/EBITDA covenant until 31 January 2012. The company is currently in receipt of three proposals (one from one of its incumbent shareholders, STT, one from the co-ordinating committee of the first lien lenders and the other from an ad hoc committee of certain holders of facility D under the Senior Facilities Agreement). Details of each proposal remain confidential, but it is Moody's expectation that none of them will involve a material equity injection that could rebalance eircom's currently unsustainable capital structure or improve the recovery prospects for the company's creditors.

The downgrade of the CFR to Caa3 reflects Moody's belief that a consensual outcome regarding the restructuring of eircom's debt should be achieved, resulting in a group loss given default of around 35%. The downgrade to C from Ca of the EUR350 million worth of senior unsecured notes due in 2016 and the EUR350 million second-lien term loan Ca reflects their expected recovery being less than 30%.

The negative outlook reflects the residual uncertainty regarding the possibility that a consensual agreement may not be achieved or could be further postponed, potentially leading to lower group recoveries.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's would consider downgrading the ratings if eircom's discussions with lenders were to conclude with a debt restructuring involving a larger-than-expected discount on debt components of the company's capital structure.

Upward pressure on the ratings is unlikely over the short term, given the negative outlook. However, Moody's could upgrade the ratings if the final debt instrument recovery rates were higher than those embedded in the current rating levels.

PRINCIPAL METHODOLOGY

The principal methodology used in rating ERC Ireland Finance Ltd was the Global Telecommunications Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 year ended 30 June 2010, eircom generated revenues of EUR1.82 billion and adjusted EBITDA (as reported by the company) of EUR679 million. The company has not yet reported its full-year audited results for the year ended 30 June 2011.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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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.

Ivan Palacios
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades ERC Ireland Finance (parent of eircom) to Caa3; negative outlook
No Related Data.
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