Valentia put on credit watch by S&P

Eircom has downplayed a potential cut in its credit rating ahead of a mooted public offering in March.

Rating agency Standard & Poor's yesterday put the company's parent, Valentia Telecommunications, on "credit watch with negative implications", which could lead to a cut in its credit rating.

The agency linked the review to concern about the company's plan to start paying dividends to shareholders if it proceeds with its flotation in March, or later this year. Standard & Poor's described the move as "an aggressive financial policy... given the moderate free cash flow expectations for Valentia in future years and the group's high leverage".

Valentia's heavy borrowings were a key risk factor for its credit rating and this would be aggravated by any material dividend payments, according to Standard & Poor's.

It added that it would "be challenging for the group to improve operating profitability and grow its net cash flow significantly enough to rapidly reduce debt as Eircom's fixed-line business has limited growth potential given the company's already high market share".

Eircom is currently seeking the permission of its bond holders to recommence paying dividends which it had agreed to suspend under the terms of a bond issue totalling €1.085 billion carried out in August. The bonds were in addition to bank debt of €1.4 billion also taken out in August.

Standard & Poor's said it expected to decide whether to cut Valentia's credit rating "following closure of the consent solicitation period or when a confirmed dividend policy is announced by the group and approved by shareholders".

An Eircom spokesman expressed confidence that Standard & Poor's would not cut the company's credit rating once the details of the proposed IPO became clear. He said that Standard & Poor's had not taken into account that a significant portion of the IPO proceeds would be used to repay borrowings. In addition, the company hoped that its credit rating would improve to investment grade subsequent to the IPO.

"A key issue for the rating agency is the level of dividend payment going forward in the event of an IPO. However, this is not yet known. Any dividend policy in this context would only be that which the board would consider to be appropriate." he said.

Meanwhile, Eircom chief executive Dr Philip Nolan told the Oireachtas Communications Committee yesterday that in the "long term" he would like to see Eircom back on the public markets with shareholders who held a long-term view. He also denied suggestions that the Valentia consortium was sweating Eircom's assets before a public flotation.

He said management had a fiduciary duty to balance short-term and long-term interests. Eircom's strategy would be the same as the one currently followed regardless of who its shareholders were, added Dr Nolan.

He said the company was investing an appropriate amount of cash in its network. If Eircom increased investment any further, it would result in a rise in costs for consumers, said Dr Nolan.