Telecom New Zealand's long-term debt ratings have been revised to negative from stable by Standard and Poor's on the news that the company is considering a functional split of its landline operations. The telecoms network confirmed that it is considering a structural separation of its copper access network from its remaining businesses in order to participate in the New Zealand government's proposed "Ultra Fast Broadband" fibre-to-the-home network.
"We consider Telecom New Zealand's vertically integrated business model to be a key driver of the group's strong business risk profile," Standard & Poor's credit analyst Paul Draffin said. "Accordingly, any separation of the fixed-line access network will have a material negative impact on TCNZ's business risk profile."
The prospect of structural separation also comes at a time when the group continues to face operating and competitive challenges in its core mobile network business. Assuming structural separation proceeds, TCNZ's business risk profile would become increasingly dependant on its mobile business and its large but increasingly competitive fixed line retail business. Furthermore, the company's lower credit quality ICT and Australian businesses will become a larger contributor to group earnings.
A lowering of the long- and short-term ratings on Telecom New Zealand could occur in the next 12-to-18 months if it agrees to structurally separate it copper access network from the rest of the group or the group's financial profile deteriorates, including fully adjusted debt to EBITDA increasing to more than 2x on a sustained basis; or there is a significant shift in earnings mix to lower-quality earnings sources, such as information technology services.
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