Eircom enjoys rating upgrade as outlook for economy improves

Moody’s has upgraded Eircom’s corporate rating, pointing to an improved operating outlook for the telecoms company and a likely debt restructuring.

The upgrade from Caa1 to B3, which still carries a high-risk investment tag, comes a week after the company announced it was seeking a two-year extension on its €2 billion debt to September 2019.

Moody's, which also upgraded the rating on several tranches of Eircom debt to B3, said it expected operating conditions in Ireland to improve partly driven by a "more benign macroeconomic environment".

This was reflected in last month’s upgrading of the country’s sovereign rating, it said.

“The reduction in the unemployment rate, the strong expansion of exports, early signs of revival in domestic demand and strong foreign direct investment are all expected to contribute to improved GDP growth prospects, which should benefit Eircom’s top line in light of the strong correlation between GDP and telecom revenues.”

Referring to the proposed takeover of O2 by Hutchinson Whampoa, which will combine two of the four mobile players in Ireland, Moody’s said it believed consolidation in the mobile market here would “accelerate market repair”.

It cautioned, however, that it was still unclear what affect the takeover would have on Eircom’s network sharing agreement with O2.

Moody’s said Eircom was “progressing well” with its investment in next-generation fibre and the roll-out of the 4G mobile network, which together with the launch of “quad-play” offers, TV, broadband, mobile and home phone - have enabled the group to strengthen its competitive positioning.

In its commentary, Moody’s said Eircom had made “good progress” in executing its business plan since the rating downgrade in June 2012, noting the company was on track to reduce its workforce by 2,000 by the end of the year, which will generate annual savings of €100 million.

Iván Palacios, Moody’s lead analyst for Eircom, said “The investments made by the company in its 4G and fibre networks, as well as the cost cutting efforts should strengthen eircom’s business model, making it more sustainable over the long run.”

“While adjusted leverage remains high, the expected improvement in business conditions and the reduced refinancing risk resulting from the planned maturity extension of the senior facility, place eircom comfortably in the B3 rating category,” he added.

A negative consideration remained the company’s high debt load, Moody’s said, which was driven, in part, by the large and volatile pension deficit, .

“The high debt load leads to large interest payments, which slows the company’s capacity to internally generate funds to reduce debt.”