Fitch Affirms Australia's Telstra at IDR 'A'; Outlook Stable
Published on: 7th Mar 2013
Note -- this news article is more than a year old.
By: Ian Mansfield
Fitch Ratings has affirmed Australia based Telstra's 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.