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Chorus warns of default after copper pricing review

Chorus' share price falls as network operator accused of 'crying wolf' to prompt Government intervention.
Written by Rob O'Neill, Contributor

New Zealand network operator Chorus has warned its bankers would be entitled to trigger a loan default if the prices it can charge for access to its copper network are slashed as determined by the Commerce Commission today.

If the Government does not intervene and rewrite the regulations, Chorus says,  it will have to discuss the decision with existing lenders and rating agencies.

It would also have to notify its lenders that in Chorus’ view the price change is “likely to have a material adverse effect on 1 December 2014 under the terms of Chorus’ borrowing arrangement.”

“If this did occur lenders would be entitled to trigger an event of default,” the company said.

New Zealand regulator the Commerce Commission released its final determination of the price Chorus should charge ISPs for access to its legacy copper network today.

The Commission set a final Unbundled Bitstream Access (UBA) price of $10.92, an increase from the draft price of $8.93.

While it has lifted its determination by nearly $2 per customer from its original draft pricing, Chorus will still have to deliver the service for around half the price it previously charged.

Chorus' share price was down nearly 7% after the announcements.

And that puts the ball back to the Government, which has previously advocated intervention to keep the price higher and protect Chorus from a hit to its revenues and to encourage the adoption of fibre, a core Government investment.

“Now that the final UBA price is known, the Government will consider its options in detail before making any further decisions,” Communications and IT Minister Amy Adams said.

Prime Minister John Key said the Government has a range of options to support Chorus and ensure the completion of New Zealand's new Ultra-Fast Broadband (UFB) network project.

"Essentially that revenue stream that they were using to fund that development is now being taken away from it. That's what's creating the challenge," he told Stuff.co.nz.

The proposed price cuts have delighted consumer advocates who accuse Chorus of “crying wolf” to pressure the Government into action.

“Chorus is a strongly profitable company that cannot possibly be at any risk as a result of this morning’s determination,” Coalition for Fair Internet Pricing spokesman Paul Brislen said.

The suggestion it could default “beggars belief”, he said.

 “It almost appears to be a case of the company talking down its own share price, to put pressure on the government to intervene in the market and over-ride the independent Commerce Commission in order to boost its profits,” Brislen said

Chorus has known about the Commerce Commission pricing review since 2011 when it put in its pitch to build the UFB network, he said. It has also had nearly a year to prepare for today’s announcement since last the draft determination last December.

“It is not credible for a company of this scale and profitability, which pays its chief executive $1.8 million a year to plan for the future, to say a well-signalled change in pricing would create the type of risks it has claimed in its extraordinary press statement this morning.”

Chorus was placed on “outlook negative” by Moody’s in March this year following a review initiated when the Commerce Commission’s first draft Unbundled Bitstream Access (UBA) decision was released.

Chorus said if the determination stands it would have to re-evaluate its business model, capital structure and existing commitments.

“The combination of significantly reduced operating cash flows, reduced borrowing capacity and increased cost of capital fundamentally changes the business model envisaged prior to demerger [from Telecom NZ].” 

It said it would also have to discuss with the Government whether Chorus is still a “credible UFB partner” in the way intended at demerger and how Chorus might deliver the balance of its UFB programme despite the funding gap implied by the decision.

Chorus estimates the change will have around a $142 million EBITDA impact, based on connection numbers at 30 September 2013. The Coalition for Fair Internet Pricing says the benefit to consumers will be $104 million a year.

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