Moody’s downgrades Chorus' on regulatory risk

Moody’s Investors Service has today issued an announcement downgrading Chorus’ [NZX: CNU] issuer and unsecured credit rating from Baa2 to Baa3, and kept its negative outlook.

Moody’s had previously placed Chorus on review for possible downgrade, following the release of the Commerce Commission’s copper broadband (UBA) pricing decision in November.

As part of its contract with Crown Fibre Holdings, Chorus has to maintain an investment-grade credit rating if it wants to pay dividends to its shareholders without the Crown entity's approval. Baa3 is Moody's lowest investment grade rating, one notch above its speculative Ba1 (although, regardless, most analysts expect Chorus to cancel dividends over the next two years in keeping with the recommendation of the pre-Christmas EY report).

Standard & Poor's put Chorus's BBB rating on CreditWatch negative in November.

Moody's said Chorus faces regulatory risk hanging over its earnings stream from services delivered on the copper network, and higher capital expenditure and operating expenses than originally anticipating, Moody's said in a statement. The negative outlook was due to the uncertainty around whether Chorus can alleviate the regulatory risk.

Chorus chief financial officer Andrew Carroll said the downgrade was disappointing given that the Commission’s pricing decision does not come into effect until December 2014 and the range of initiatives Chorus continues to explore to mitigate the financial impact of the Commission’s final UBA decision.  Moody’s decision will result in an immediate but modest increase in the cost of Chorus’ borrowing.

“As we explained in December, we are assessing all options available to us, including cutting all discretionary activity, re-pricing commercial services, generally managing for cash and assessing capital management options.  We have also commenced constructive discussions with Crown Fibre Holdings. While this work continues, we cannot finalise our medium term strategy or capital management settings.

“In addition, Chorus has appealed the Commission’s initial UBA decision to the High Court and requested that the Commission undertake economic cost modelling of both UBA and UCLL pricing, which differs from its original benchmarking approach, as allowed for by the legislation,” he said.

Chorus is currently rated BBB, creditwatch negative, by Standard & Poor’s.