Chorus suspends dividend payments, tweaks banking covenants

Chorus [NZX: CNU], the telecommunications network operator, has suspended dividend payments as regulatory uncertainty weighs on its balance sheet, and has renegotiated its banking covenants to give it some financial breathing space.

The Wellington-based company won't pay a dividend until June 30, 2015 or the conclusion of the Commerce Commission's final ruling on how much Chorus can charge customers on its regulated copper-based services, whichever is the later, it said in a statement. It has also amended the terms of its bank debt to allow for weaker earnings relative to its borrowings, and will limit how much it draws on the facilities until the commission's review process is completed.

"The changes we have agreed with the banks reflect Chorus's focus on achieving financial stability, particularly with the Commerce Commission's pricing review process now scheduled to continue through to April next year," chief financial officer Andrew Carroll said. "We also have an extensive range of operating cost, capital expenditure and revenue initiatives in train to help address this ongoing period of price uncertainty."

Last week Chorus cut a deal with Crown Fibre Holdings, the government entity funding the ultrafast broadband build, to let the network operator bring forward funding of $178 million to ensure it has the cash to build the bulk of the national fibre network. If Chorus draws on the funding it won't be able to pay a dividend without Crown Fibre Holdings' permission before December 2019.

Today's announcement increases Chorus's bank covenant levels to 4.25 times net debt to earnings before interest, tax, depreciation and amortisation at pricing levels in line with the regulator's initial decision, from its current 3.75 times. It also extends the maturity of the facility to July 31, 2016 from November 2015, and waives rights potentially available to the banks associated with the material reduction set to take effect from December this year.

Chorus committed to limit total drawings to $1.2 billion across all facilities until the regulator's decision is made, and has reduced its July 2016 facility by $100 million to $575 million.

The network operator will pay a fee to amend the covenants, but won't face new borrowing margins or other fees.

Earlier this year Chorus announced plans to scale back re-investment in its ageing copper network, which faces regulated price cuts, while introducing new unregulated revenue streams and cutting costs, including probable job cuts. It also suspended payment of an interim dividend.

Last year the commission proposed cutting the network operator’s pricing on its copper line services, which Chorus said left a $1 billion hole in the funding for the roll out of the government-sponsored UFB. In March, Crown Fibre Holdings gave Chorus greater flexibility in building the network provided it meets the agreed deadline, and has aligned funding with completed work.

Chorus is appealing a High Court ruling upholding the way the regulator set a theoretical price for services on the copper lines, and has also requested that a more complete final pricing principle method is used to set the price. The regulator anticipates it will come up with a final price by April next year.

The share rose 0.6 percent to $1.665 yesterday, and have gained 16 percent this year, after being punished by investors last year over the regulatory risk.

(BusinessDesk)