RATING AGENCY Standard & Poors (S&P) has downgraded the parent companies behind Eircom, arguing that their high debt burden and high cost base will make it difficult for the company to surmount weakness in the Irish market.
The S&P downgrade on Eircom, which is battling an unwelcome takeover approach from its former management,comes weeks after rival agency Moody’s put €3.65 billion of the company’s debt under review for a possible downgrade.
Eircom’s acting chief executive Cathal Magee and the company’s board are fighting a takeover approach led by former Babcock Brown director Rob Topfer, the financier who orchestrated the private equity-style takeover of the company three years ago.
Mr Magee has said that Eircom is looking for a “commercial solution” that underpins the strategic development of the business in the longer term while departing from the “failed models” pursued to date.
In a new assessment of Eircom and its holding companies – BCM Ireland Preferred Equity (BCMIPE) among them – SP said the outlook for the business was stable while downgrading to B from B-plus its long-term corporate rating on the firm.
“The downgrade reflects our view of the current operating environment and increased risks for the BCMIPE group.
“For the quarter to December 31st, 2008, Eircom’s reported fixed-line revenues and EBITDA declined by 2.9 per cent and 7.3 per cent, respectively, compared with the previous year, due to the sharp deterioration in the Irish economy.
“We believe that BCMIPE group’s high financial leverage and cost structure are likely to hamper a timely and effective response.
“In our view the disclosed pension deficit and potential sale of the BCMIPE group also increase downside credit risk. BCMIPE reported total debt of €4.2 billion and cash of €285 million on December 31st, 2008.
“The ratings primarily reflect our view of the BCMIPE group’s persistently high debt burden and weak free cash flow generation in a challenging operating environment.
“They also reflect that weakening EBITDA as a result of cost reductions has been insufficient to offset pressures on revenues.
“Other factors that, in our view, place pressure on the ratings are BCMIPE group’s tightly regulated tariffs, and the financial burden of investment in the network that is needed to sustain and grow its business.
“Eircom retains an entrenched position in the Irish fixed-line telecoms market, which supports the ratings.
“The current ratings factor in that operational remediation steps currently being implemented will reverse the sequential decline in group EBITDA in a timely fashion.”
