Moody’s Investor Services has downgraded Optus ’ senior unsecured long-term rating from Aa3 to A1, and revised the outlook from negative to stable.
A1-rated obligations are considered upper-medium grade and are subject to low credit risk, while obligation rated Aa3 are of high quality and subject to very low credit risk.
Moody’s senior vice-president, Ian Lewis, said, “The downgrade reflects the weakening in Optus’ credit profile at the previous rating level, with trend in elevated leverage, intensely-competitive operating environment, and business profile that is comparatively weak compared to major telcos at that rating level.
The new rating considers the uncertainty surrounding the telecommunications provider’s capital structure and the level of cash which will be repatriated to Singapore Telecommunications (SingTel). It also gives Optus a degree of headroom to manage its capital and the likely impact of market competition.
According to Moody’s statement to the ASX, “Further excessive up-streaming of cash flows to Optus’ parent or increased borrowing to fund new acquisitions or capex could lead to further pressure on the rating.”
“In addition, heightened levels of competition in Optus’ operating environment could lead to reduced revenues and/or compressed margins.”
At the same time, Moody’s expects Optus’ financial leverage to increase: as it moves to fund its purchase of new spectrum, at least partially through additional debt; on the back of debt-funded investments and shareholder-friendly activities.
“Positive pressure on the rating could evolve over time if cashflow repatriation to the parent and capex moderates to levels that are consistent with long-term sustainable leverage of below 1.4x debt/EBITDA.”
On the other hand, Moody’s claims Optus’ operating profile is likely to weaken on the back of competition in the mobile market, with competitor Telstra capturing “the lion’s share of the mobile market,” with a stable A2 rating.
Optus’ short-term P-1 rating is unaffected by the rating action and is affirmed.