Junk bond status for Eircom

Wed, Mar 3, 2004, 00:00

Eircom's corporate credit rating has been cut to junk bond status days before the publication of the prospectus for its planned flotation in Dublin and London.

International credit rating company Standard and Poor's has cut the rating of Eircom's parent, Valentia Telecommunications, from the lowest investment grade (BBB-) to speculative, or junk grade (BB+).

It said the "credit protection" afforded to holders of the company's €2.2 billion in debt would be weakened following the decision to pay increased dividends as part of its flotation strategy.

Mr Michael O'Brien, a credit analyst with S&P, said: "The rating actions primarily reflect the change in Valentia's financial policy." He added: "Given the group's high leverage and moderate free cash flow expectations over the next few years, and despite some equity proceeds from current owners, the payment of significant dividends is deemed aggressive."

Eircom is likely to publish its flotation prospectus this week. The company is expected to join the market with a capitalisation of around €1.4 billion and plans to raise €300 million in fresh equity, of which around €200 million is earmarked for debt reduction.

The firm had been hopeful that it would be re-rated upwards as a consequence of its flotation. The company already has a speculative or junk grade from Moody's, the other leading rating agency.

S&P said yesterday that notwithstanding the negative re-rating, it expected Eircom to improve its debt protection measures while paying moderate dividends.