Moody's lowers Eircom debt rating

RATINGS AGENCY Moody’s has downgraded Eircom’s debt for the third time this year and suggested that it could breach its financial covenants by the end of June 2011 – some six months earlier than management has indicated.

ERC Ireland Finance Ltd, Eircom’s parent entity, was downgraded to Caa1 from B3.

In addition, Moody’s downgraded ERC’s €350 million worth of senior unsecured notes due in 2016, and a €350 million second-lien term loan to Caa3 from Caa2. A €3.3 billion senior secured facility was downgraded from B3 to B2.

A Caa rating means Moody’s judges Eircom to be of “poor standing and subject to very high credit risk”.

Moody’s said the downgrades reflected the increased uncertainty regarding the economic outlook in Ireland following the country’s EU-IMF bailout, and the “effect of austerity measures on consumer spending”.

Moody’s noted that Eircom’s revenues declined by 5.6 per cent year on year in the quarter to the end of September 2010.

It said this was driven by a “severe” 9.2 per cent drop in mobile revenues but added that cost-cutting allowed it to report stable earnings of €168 million.

“In Moody’s view, Eircom will find it increasingly challenging to continue to reduce its cost base in order to adjust to the expected decline in its revenue,” said Iván Palacios, lead analyst for Eircom at Moody’s.

He said a failure to maintain its earnings at current levels, due to a more rapid decline in revenue, could accelerate a breach of covenants under its existing facilities.

“Moody’s had anticipated this occurring in the quarter ended June 2011, but it could happen even sooner,” Mr Palacios added.

Last week, on the publication of its first quarter results, Eircom warned that it could breach its financial covenants within 12 months.

Moody’s noted that Eircom is assessing its options regarding its long-term financial strategy, including a renegotiation of covenants and an equity cure.

“Moody’s is concerned by the uncertainty regarding the timing for the finalisation of these discussions and the options being considered by management,” Mr Palacios said. “The downgrade also reflects Moody’s concerns regarding Eircom’s capital structure, which remains highly leveraged, and on the recovery expectations for debt-holders, which may be impacted by the increased uncertain macro-economic environment in Ireland.”

No comment was available from Eircom yesterday.