Fitch Affirms Australia's Telstra at IDR 'A'; Outlook Stable

Wed Mar 6, 2013 11:08pm EST

(The following statement was released by the rating agency) SYDNEY, March 06 (Fitch) Fitch Ratings has affirmed Australia-based Telstra Corporation Limited's (Telstra) Long-Term Issuer Default Rating (IDR) and its senior unsecured rating at 'A'. The Outlook of the IDR is Stable. The Short-Term IDR and the commercial paper rating have been affirmed at 'F1'. Key Rating Drivers Telstra's ratings are underpinned by the contractual cash flows associated with its agreements with NBN Co. and the Australian government (NBN agreements). The ratings also reflect Telstra's leading market share in the fixed-wire and wireless communication markets as well as its prudent capital management strategy. Telstra is well-positioned to withstand the negative cash flow impact of a reversal of government policy on the NBN agreements. In the event that these agreements are terminated, Telstra will continue to have a contractual right to receive infrastructure rental payments for equipment leased to NBN Co. and could resume its fixed-wire incumbency in areas not covered by the NBN network. Moreover, in the event that the NBN network is rolled out to over 20% of target premises by the time new NBN legislation is passed, Telstra will be entitled to a AUD500m termination payment. Telstra's competitive advantages are its superior coverage, the reliability and technology leadership of its wireless network, the coverage and capacity of its backhaul network and its ownership of a material share of domestic mobile spectrum. The company's strong free cash flows, relative to competitors', enable it to sustain this advantage and facilitate growth in mobile voice and broadband margins while increasing market share. The nature of competition in the Australian mobile telecommunications industry is unlikely to change in the near future, since its low population density and the lack of available spectrum deter potential new entrants. Telstra has been prudent in its approach to distributing surplus free cash flow from the NBN transaction to shareholders. The company has indicated that it intends to distribute surplus free cash flows that accumulate after setting aside funding for investment expenditure, future capital commitments and funding requirements to retain financial flexibility. The model employed by Telstra should ensure that the company's leverage will not be materially affected by the payment of special dividends. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Funds flow from operations- (FFO) adjusted net leverage rising above 1.75x on a sustained basis - A material adverse change to the terms and conditions of the NBN agreements - Negative free cash flow after dividends on a sustained basis Positive: Given sector-related risks a rating upgrade is unlikely in the medium term. Contacts: Primary Analyst Johann Kenny, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd. Level 15, 77 King Street, Sydney, NSW 2000 Secondary Analyst Sajal Kishore Director +61 2 8256 0321 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, "Corporate Rating Methodology", dated 8 August 2012, are available at www.fitchratigs.com. Applicable Criteria and Related Research Corporate Rating Methodology here Rating Telecom Companies here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.