Moody's downgrades Eircom's debt

Moody's, the international credit rating agency, has downgraded Eircom's debt following its €2.36 billion takeover by Babcock & Brown and its own employees.

With quarterly results due today from the former State telcoms group, the agency said in a statement that it had downgraded its rating of the company's debt to Ba3 from Ba2. It also downgraded the debt of Eircom's outgoing owner Valentia, which is chaired by Sir Anthony O'Reilly.

The downgradings follow a review of Eircom after Babcock & Brown and the Eircom employee share ownership trust (ESOT) made a full offer for the company. However, Moody's said the outlook on the ratings was stable.

This reflected its expectation that the company will execute its current business plan successfully, focusing on the development of its mobile unit Meteor and limiting the decline in its fixed-line revenues. "Moody's expects that a successful execution of the plan will lead to an improvement in credit metrics."

Downgrading Eircom, Moody's cited its high initial leverage after the buy-out as well as ongoing regulatory and competitive risks, the uncertainty on its long-term plans for mobile telephony and its dependence on the fixed-line business. "Eircom's high initial leverage and very limited financial flexibility reflect the weak positioning of the corporate family rating at the Ba3 level," it said.

"However, despite these significant challenges, the rating is underpinned by (i) Eircom's dominant position in the Irish fixed-line telecommunications market and the competitive advantage afforded by the company's significant scale and network reach; (ii) the growth potential of the recently acquired mobile operations; (iii) the strong operational cashflow provided by Eircom's businesses; (iv) a favourable competitive fixed-line environment; (v) the success in reducing costs and improving cashflow.

"In addition, Eircom benefits from the current strength of the Irish economy and its favourable demographics, such as population growth, net immigration and housing growth, and low average age of the population."

Noting that Babcock & Brown has tendered for Valentia's debt, Moody's said its downgradings reflected its assessment of the potential risk for any bonds that are not tendered.

The agency downgraded the rating of Valentia Telecommunications Unlimited's €550 million unsecured notes due 2013 to B2 from Ba3 and the rating of Eircom Funding plc's €285 million and $250 million senior subordinated notes due 2013 to B2 from B1.

"The rating on the existing €1.4 billion senior secured credit facilities was also downgraded to Ba3 and is expected to be withdrawn once it is refinanced by a new €3.5 billion secured credit facility."