The level of cash flow generated by Australian telco AAPT would be a focus in the credit rating evaluation of parent Telecom Corporation of New Zealand, Moody's Investors Service said on Wednesday.
Telecom announced on Tuesday that it was setting its course for growth in Australia through a AU$444 million bid to move to full ownership of AAPT. It currently owns about 80 percent.
Telecom, New Zealand's largest telecommunications company, said the debt-funded bid would be slightly dilutive to its earnings in its first year, but it did not see the move as having impact on credit ratings.
"Within itself, that (bid) would tend to weaken its financial profile because they are taking more debt on board. And they are getting access to 20 percent more of AAPT's cash flow," Charles Macgregor, a Moody's senior analyst told Reuters in a telephone interview.
"That's probably where the crux of the matter comes in, is how much is that 20 percent going forward in cash flow terms? Does it provide enough coverage for that additional debt to maintain the rating at its current level? So that's what I'll be interested in."
The debt-funded purchase of Telecom's current AAPT stake helped push up total interest-bearing long and short-term liabilities to NZ$4.3 billion at June 30, from NZ$2.07 billion a year earlier. Last December Moody's downgraded Telecom's senior unsecured ratings to A1 from Aa2 and its subordinate ratings to A2 from Aa3, with a stable outlook.
The rating agency said at the time the downgrade was due to the adverse changes in Telecom's risk profile following the acquisition of a majority stake in AAPT.
"I haven't formed a view yet. I've got to talk to the company first and just sort of work that out. It has both positive and negative implications," Macgregor said.
Some of the benefits of full ownership would be that Telecom could implement its business plan without having to refer to minority interest holders. Better communication ties with AAPT management would also enable significant decisions to be made on a more timely basis, he said.
"If we thought that the cost-benefit analysis did not indicate that the rating was correctly positioned, then we'd look at putting it on review."
Telecom shares closed down six cents at NZ$7.14 per share after hitting a new 33-month low of NZ$6.85 on Wednesday.
As well as its move on AAPT, the company announced a reduced, but anticipated annual net profit of NZ$783 million on Tuesday and a cut in future dividends to 50 percent of net earnings (from a minimum 70 percent previously).
Macgregor played down the impact on Telecom of New Zealand's weakening economy and rises in domestic interest rates over recent months.
"What we've seen in Asia is that telecom revenues tend to grow despite the fact that you might have negative economic growth environment," Macgregor said
