Telus shares drop on Moody's debt downgrade

Telus shares fell after Moody's cut its rating on the company's debt to "junk" status

Shares of Telus Corp. (TSX:T)fell more than 23 per cent on Thursday after Moody's Investors Services cut its rating on the company's debt to speculative.

The stock closed off $2.15 at $7.00 on the TSX.

The rating agency lowered its rating on Telus' unsecured debt from Baa2 to Ba1. According to Moody's, debt rated at Ba1 are "judged to have speculative elements; their future cannot be considered as well-assured." Debt rated that low are more commonly referred to as "junk" status.

Moody's said the downgrade reflects its concern that Telus' free cash flow to repay debt will be modest relative to its debt level even in 2004. Moody's also believes Telus will have a negative free cash flow this year and likely next.

Moody's said its outlook for Telus is negative, as it sees possible problems with the company's restructuring and business plans.

"The company may have little flexibility to react to adverse developments, as it has already reduced its dividend, has few significant non-strategic assets available to sell, and is quickly moving to a maintenance level of capital expenditures," Moody's said.

Telus fired back at Moody's after markets closed on Thursday, calling the debt rating downgrade "unwarranted".

"Three other credit agencies Standard & Poors, Dominion Bond Rating Service and Fitch Ratings who were provided with the same information, issued decisions this month rating TELUS' debt at two notches above Moody's, reaffirming our investment grade ratings," Robert McFarlane, Telus' executive vice president and chief financial officer, said.

The company said it does not need to issue new debt on the public market, Telus said the rating downgrade will not have a significant effect on its interest costs, adding that the estimated increase is $3 million to $4 million per year.

Telus had $9 billion in debt at the end of last year, and Moody's believes that will increase again in 2002 and possibly 2003 before the company can use its cash flow to lower its debt.

In a bid to cut costs, Telus said earlier this month that it will cut 6,000 jobs by the end of next year including 5,000 union jobs and 1,000 management positions as it consolidates operations.

The company is also hoping to cut it staff through voluntary reductions. It has offered buyout packages to 11,000 of its 28,000 workers.