Telstra cops Moody's downgrade

US-based Moody's Investors Service downgraded Telstra's financial rating overnight, in light of the telco's proposed deal with Hong Kong entrepreneur Richard Li's Pacific Century CyberWorks (PCCW).

Moody's downgraded Telstra's senior unsecured ratings to Aa3 from Aa2 -- a move it said would affect approximately $US5.6 billion worth of debt securities.

In a statement, the international financial ratings service said its action reflected "Telstra's enhanced appetite for leverage" which was evidenced by the proposed $5 billion "debt funded investment" in, and with, PCCW.

Moody's said it expected Telstra would pursue similar investments should the PCCW deal collapse. While both Telstra and PCCW have stated they intend to complete the deal, PCCW has yet to finalise its $US38 billion takeover of Cable & Wireless Hong Kong -- a prerequisite of the deal with Telstra.

Explaining the downgrade, Moody's said it had considered the risks associated with the increased financial leverage resulting from the PCCW investment, which had "little prospect of enhancing operating cash flow in the short term".

And offering leverage of a different kind to those promoting the full privatisation of Telstra, Moody's said it had taken into account the "limitations associated with being 50.1 per cent government owned including (the) inability to access equity markets and intense public scrutiny of cost initiatives".

Moody's said it also considered the "competitive environment in Australia, due in part to continued regulatory developments", and the implementation risks of the joint venture with PCCW.

While Telstra's short-term rating of Prime-1 was not subject to the current review, Moody's said the rating outlook was stable, reflecting that Telstra's status as the "pre-eminent provider of telecommunications services in Australia". The rating also reflected the long-term benefits that may emerge from the joint ventures with PCCW, Moody's said.

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