S&P revises Chorus debt to EBITDA threshold upwards

Chorus Limited
Level 10, 1 Willis Street
P O Box 632
Wellington
New Zealand

Email: company.secretary@chorus.co.nz

STOCK EXCHANGE ANNOUNCEMENT

20 November 2019


S&P revises Chorus debt to EBITDA threshold upwards

S&P has released the attached update on Chorus.

The update states that the downgrade threshold for Chorus has been revised to a
debt to EBITDA ratio of 4.25x at the current rating level, compared with a debt
to EBITDA ratio of 4x previously.

The long-term rating remains at BBB stable.

ENDS


For further information:

Brett Jackson
Investor Relations Manager
Phone: +64 4 896 4039
Mobile: +64 (27) 488 7808
Email: brett.jackson@chorus.co.nz


Nathan Beaumont
Stakeholder Communications Manager
Phone: +64 4 896 4352
Mobile: +64 (21) 243 8412
Email: Nathan.Beaumont@chorus.co.nz

---

Chorus Ltd.
Primary Credit Analyst:
Ieva Erkule, Melbourne (61) 3-9631-2085; ieva.erkule@spglobal.com
Secondary Contact:
Graeme A Ferguson, Melbourne (61) 3-9631-2098; graeme.ferguson@spglobal.com
Table Of Contents
Credit Highlights
Outlook
Our Base-Case Scenario
Company Description
Business Risk
Financial Risk
Liquidity
Covenant Analysis
Environmental, Social, And Governance
Issue Ratings - Subordination Risk Analysis
Reconciliation
Ratings Score Snapshot
Related Criteria
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Chorus Ltd.
Business Risk:STRONG
VulnerableExcellent
Financial Risk:SIGNIFICANT
Highly leveragedMinimal
bbbbbbbbb
AnchorModifiersGroup/Gov't
Issuer Credit Rating
BBB/Stable/--
Credit Highlights
Overview
Key StrengthsKey Risks
Strong market position as owner of the dominant fixed-line
telecommunications wholesale access network in New Zealand
Network volume risks associated with wireless substitution and
line loss to local fiber companies
Improved revenue visibility due to new regulatory frameworkUnforeseen cost escalation risks associated with the Ultra-Fast
Broadband (UFB) rollout
High capital barriers to competition and strong operating cash flowLower-than-anticipated household growth may limit overall
market share
Financial policy framework that is supportive of the 'BBB' ratingMaintaining legacy copper network and nonmandatory migration
to fiber
We have revised the downgrade threshold for Chorus Ltd. to a debt to EBITDA of 4.25x at the current rating level,
compared with a debt to EBITDA of 4x previously.This revision reflects our view of the company's overall robust
credit profile, underpinned by its leading position in New Zealand's fixed-line network. In our view, the execution of,
and cost escalation risks associated with, the UFB fiber-to-the-home (FTTH) network rollout have reduced, given that
82% of the UFB rollout is now complete. The year ended June 30, 2019, was Chorus' peak rollout year, and UFB
uptake has increased from 45% to 53%. We, therefore, have better visibility over the company's free cash generation
over the next few years.
The proposed new regulator y framework is favorable for Chorus in so far as it should provide transparency and
predictability in future price setting for the fiber network.Under the new regulation, a utility-like "building block"
regulatory framework will be applicable to the fiber network from 2022. We don't currently view Chorus as a utility-like
company given nascent wireless substitution risks. That said, we will continue to monitor Chorus' industry
characteristics.
We believe Chorus will maintain a disciplined approach to shareholder returns and financial policy decisions.Chorus
remains committed to supporting credit quality at the current rating level. We expect debt to EBITDA to not exceed
4.25x over the next two years.
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Outlook: Stable
The stable outlook reflects our expectation that Chorus' strong network position, increasing free operating cash
generation, enhanced financial flexibility, and disciplined approach to capital management will offset risks
associated with the group's remaining FTTH capital-expenditure program and risks associated with wireless
substitution, line loss to other local fiber companies, and migration from its legacy copper network.
We will monitor the extent to which Chorus is forced to respond to wireless substitution risk in the context of its
new regulatory framework. We may adjust the company's debt capacity at the 'BBB' rating level, either upward or
downward, to reflect the prevailing competitive landscape.
Downside scenario
Downward rating pressure could occur if debt-to-EBITDA exceeds 4.25x or a material decline in the group's
covenant headroom or liquidity were to occur.
Over the longer term, higher-than-expected wireless substitution that significantly worsens the group's earnings
generation or stability could put downward pressure on the rating or debt capacity at the 'BBB' rating level.
Upside scenario
We consider upward ratings pressure to be unlikely over the next few years, given the company's
capital-management objectives and UFB funding requirements. Nonetheless, the establishment of a regulatory
track record and resilience to wireless substitution risks could provide incrementally higher debt capacity at the
'BBB' rating level.
Our Base-Case Scenario
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Chorus Ltd.

AssumptionsKey Metrics
• GDP growth in New Zealand in 2019 and 2020 of
2.5%;
• Population growth leading to increase in premises
that drive underlying market growth for
telecommunications.
• Negative low single-digit revenue growth fiscal 2020,
driven by copper line disconnections that are offset
by fiber connections. Moderate revenue growth
likely thereafter.
• Fully adjusted EBITDA margins of about 66% from
2020;
• Adjusted EBITDA to stabilize at the NZ$640
million-NZ$660 million range over the next two
forecast years;
• Gross capital expenditure of about NZ$700 million
in fiscal 2020 (before any offset from government
contributions), driven by the rollout of UFB 1 and 2;
and
• Dividend of 24 cents per share with a dividend
reinvestment plan.
Year end June 302019A2020F2021F
Debt to EBITDA (x)4x<4.25x<4.25x
FFO to debt (%)19.618-2018-20
FOCF to debt(12.3%)About (7%)About (1%)
A--Actual. F--Forecast. FFO--Funds from operations.
FOCF--Free operating cash flow.
Base-case projections
In our view, EBITDA growth will be modest in the medium term.We expect reduced connection revenues will be
partly offset by cost-reduction initiatives.
Chorus' focus on cost-reduction initiatives will drive efficiencies.The company is introducing new digital solutions to
drive down network maintenance costs and deliver IT operating cost savings. Furthermore, the company recently
announced a workforce restructuring (affecting around 500 roles), which we believe should have an enduring benefit to
Chorus' earnings profile.
Financial flexibility is likely to improve.We anticipate material free operating cash flow as the fiber broadband rollout
nears completion, which should progressively improve Chorus' financial flexibility.
Company Description
Chorus is a provider of telecommunications infrastructure throughout New Zealand. The company is the owner of the
majority of telephone lines and exchange equipment in New Zealand and responsible for building approximately 75%
of the new fiber optic UFB network. The government-backed UFB will cover 87% of the population, with stage UFB1
(75% of the population) due to complete in December 2019 and stage UFB2 (12%) in 2022.
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Chorus Ltd.

Chorus owns and operates the majority of New Zealand's fixed-line telecom access network, including the legacy
copper network. The group provides wholesale access to copper and fiber networks to retail service providers. In
2011, Chorus was structurally separated from Telecom New Zealand, which was later rebranded as Spark New
Zealand prior to its rollout of the UFB.
Chart 1
Business Risk: Strong
The group's ownership of the dominant fixed-line telecommunications wholesale access network in New Zealand and
high capital barriers to competition underpin the business strengths. Tempering these strengths are network volume
risks associated with wireless network substitution and competition from local fiber companies.
We expect increasing data consumption to support demand for Chorus' fiber network due to increasing demand for
data-intensive products and services (such as video and audio streaming, online gaming services, and cloud storage
services). Data usage on the Chorus network has continued to grow rapidly over the past three years. Average monthly
data usage has increased from 123 gigabytes to 279 gigabytes, and fiber customers are averaging 360 gigabytes a
month.
As the UFB rollout gathers pace, New Zealand's fiber adoption rate is more than double the average worldwide rate
and second to Japan. About 44% of New Zealand consumers now primarily access the internet through a fiber
connection. We generally view fixed-line fiber characteristics as faster, less prone to congestion, have longer
life-cycles, more scalable, more reliable, and are less expensive to operate and maintain. In our opinion, these
characteristics materially temper wireless substitution risks.
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Chorus Ltd.

Chart 2
Nevertheless, we view the risk of wireless network substitution as meaningful. Vertically-integrated mobile network
operators are incentivized to bypass fixed-line wholesalers in order to capture the full value chain. Average data usage
statistics are skewed toward high-volume users, leaving a sizable addressable market available to mobile network
operators, who are likely to target a sizable market segment of lower demand users in higher-density metropolitan
locations. We also note that mobile network operators make up the bulk of fixed network retailers who act as
"gatekeepers", providing them with some flexibility to direct customers to the most profitable network.
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Chorus Ltd.

Chart 3
That said, wireless broadband technology has capacity constraints that are not easily surmounted, at least in the
medium term. Moreover, we view the competitive intensity of New Zealand's mobile market as benign relative to other
developed markets. Our cellular investment projections imply that wireless substitution will likely be incremental and
over an extended period.
We believe fixed wireless broadband could reach about 15% of New Zealand's population within the next few years
and could be materially higher over the longer term. Chorus also faces line losses to local fiber companies in regions
where the company does not own the fiber network. Chorus has responded with a number of initiatives including
promoting its existing fiber and copper networks, incentivizing retail service providers, and investing in better
customer experience particularly during installation.
In our view, the execution of, and cost escalation risks associated with, the UFB FTTH network rollout have reduced,
given that 82% of the UFB rollout is now complete. Fiscal 2019 was the peak buildout year and Chorus' capital
expenditure peaked at about NZ$804 million, with about 83% relating to fiber assets. Chorus' capital expenditure is
likely to decline significantly post year end 2020 due to completion of UFB1 and the majority of the UFB2/2+ rollout.
Furthermore, Chorus has demonstrated a solid track record of streamlining the rollout process. This mitigates the risk
of cost escalation for UFB2/2+, which extends the fiber network to more remote rural areas and lengthens the
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build-out period to beyond 2022.
Chart 4
In November 2018, the Telecommunications (New Regulatory Framework) Amendment Act passed by the
Government of New Zealand. Under the new regulation, a utility-like "building block" regulatory framework will be
applicable to the fiber investment from 2022. The New Zealand Commerce Commission (NZCC) regulates the prices
that Chorus can charge for use of its local copper lines and broadband services. Chorus has pricing certainty on its
copper and fiber products until 2022, after which the NZCC will apply a utility-like "building block" regulatory
framework for fiber. The government intends to deregulate Chorus' copper network post-2020 in areas where fiber is
available. We note that the NZCC released its draft Fibre Input Methodologies Decision on Nov. 19, 2019. The draft
decision will be followed by a final Input Methodologies decision in mid-2020, and then Price-Quality decisions in
mid-2021.
We consider that the proposed regulatory framework should provide Chorus with transparency and predictability in
future price setting for the fiber network. However, it does not fully offset underlying risks associated with the
telecommunications industry, given that Chorus remains exposed to competition from alternative technologies as well
as other fiber companies.
In our view, deregulation of the copper network may require Chorus to change its pricing and investment strategy for
its copper network as it competes with alternative technologies and seeks to migrate customers to its fiber network.
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Chorus Ltd.

Unlike Australia's National Broadband Network (NBN), there will be no forced migration from the copper network.
Peer comparison
We view Telekom Malaysia Bhd. (A-/Stable/--) and Vector Ltd. (BBB/Stable/--) as relevant peers for Chorus with
their strong positions in respective markets. We consider Vector Ltd., a electricity and gas distribution company in
New Zealand, the most comparable rated peer for Chorus. We note that Chorus' business risk profile is weaker than
Vector's due to competitive challenges to Chorus' network position from wireless network substitution and line losses
to local fiber companies.
Among the New Zealand regulated utilities we rate, Vector has a greater exposure to unregulated cash flow. This is
captured in our assessment of a strong business risk profile.
Telekom Malaysia is the dominant fixed-line, data, and broadband operator in Malaysia. Furthermore, the company
benefits from a moderately high likelihood of extraordinary government support from the Malaysian government.
Table 1
Chorus Ltd.--Peer Comparison
Industry sector: Misc telecommunications
Chorus Ltd.Telekom Malaysia Bhd.Vector Ltd.
Ratings as of Nov. 15, 2019BBB/Stable/(NR)A-/Stable/--BBB/Stable/NR
--Fiscal year ended--
June 30, 2019Dec. 31, 2018June 30, 2019
(Mil. Mix currencies)NZ$RMBNZ$
Revenue970.011,819.31,029.7
EBITDA636.33,680.4485.8
Funds from operations (FFO)500.32,918.3285.0
Interest expense176.0587.7127.6
Cash interest paid133.0567.9139.2
Cash flow from operations492.02,883.0272.2
Capital expenditure806.02,263.6333.7
Free operating cash flow (FOCF)(314)619.4(61.5)
Discretionary cash flow (DCF)(363)155.5(234.4)
Cash and short-term investments273.02,758.327.6
Debt2,553.07,350.02,548.2
Equity979.07,015.52,502.5
Adjusted ratios
EBITDA margin (%)65.631.147.2
Return on capital (%)7.410.54.8
EBITDA interest coverage (x)3.66.33.8
FFO cash interest coverage (x)4.86.13.0
Debt/EBITDA (x)4.02.05.2
FFO/debt (%)19.639.711.2
Cash flow from operations/debt (%)19.339.210.7
FOCF/debt (%)(12.3)8.4(2.4)
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Chorus Ltd.

Table 1
Chorus Ltd.--Peer Comparison (cont.)
DCF/debt (%)(14.2)2.1(9.2)
RMB--Chinese renminbi. NZ$--New zealand dollar.
Financial Risk: Significant
We consider Chorus' financial policy framework to be supportive of the 'BBB' rating on the group. This includes our
expectation that the group will actively manage debt to EBITDA below 4.25x on a long-run basis. In addition, we
expect operating cash flows to incrementally support Chorus' funding requirements during the rollout period. We
anticipate material free operating cash flow generation as the fiber broadband rollout nears completion, which should
improve the cushion in Chorus' credit metrics over time.
Under our base-case forecasts, we expect the company's fully adjusted debt-to-EBITDA to track at about 4.1x as it
reaches the peak of its build in 2020. Nonetheless, we expect the company to manage its dividends and other capital
initiatives, if required, to maintain an adequate level of rating headroom in the event of an unexpected and material
escalation in competition or UFB build costs. In our view, Chorus has increasing flexibility–under a range of proposed
revenue, cost, and capital management initiatives to temper the impact and maintain a financial risk profile consistent
with the 'BBB' rating.
Chart 5
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Chorus Ltd.

About half of the UFB build cost is funded by payments from Crown Infrastructure Partners (CIP, a New Zealand
government-owned entity), through its CIP securities issued to Chorus in the form of debt and equity-like securities.
We treat the equity securities as 100% equity in our financial ratio calculations, and the net present value of the debt
securities as 100% debt.
We note that under this funding structure, there is no cash impact on Chorus until 2025. CIP debt securities are
unsecured, non-interest bearing, and carry no voting rights. Chorus is required to redeem the securities in tranches
from June 30, 2025 to 2036 by repaying the issue price to the holder. Dividends will become payable on a portion of
the CIP equity securities from 2025 (2030 for UFB2 and UFB2+), with the portion of CIP equity securities that attract
dividends increasing over time.
Financial summary
Table 2
Chorus Ltd.--Financial Summary
Industry sector: Misc telecommunications
--Fiscal year ended Jun. 30--
20192018201720162015
(Mil. NZ$)
Revenue970.0990.01,040.01,008.01,006.0
EBITDA636.3653.3637.8599.7607.5
Funds from operations (FFO)500.3502.3476.1426.1420.1
Interest expense176.0153.0147.6144.6147.4
Cash interest paid133.0121.0123.6126.6139.4
Cash flow from operations492.0504.0524.4433.9414.1
Capital expenditure806.0766.0616.5569.0589.0
Free operating cash flow (FOCF)(314)(262)(92.1)(135.1)(174.9)
Discretionary cash flow (DCF)(363)(305)(136.1)(150.1)(174.9)
Cash and short-term investments273.050.0170.0102.080.0
Gross available cash273.050.0170.0102.080.0
Debt2,553.02,270.02,035.11,933.61,912.5
Equity979.01,022.0944.0871.0819.0
Adjusted ratios
EBITDA margin (%)65.666.061.359.560.4
Return on capital (%)7.48.710.510.010.8
EBITDA interest coverage (x)3.64.34.34.14.1
FFO cash interest coverage (x)4.85.24.94.44.0
Debt/EBITDA (x)4.03.53.23.23.1
FFO/debt (%)19.622.123.422.022.0
Cash flow from operations/debt (%)19.322.225.822.421.7
FOCF/debt (%)(12.3)(11.5)(4.5)(7.0)(9.1)
DCF/debt (%)(14.2)(13.4)(6.7)(7.8)(9.1)
NZ$--New zealand dollar.
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Chorus Ltd.

Liquidity: Adequate
We consider Chorus' liquidity to be adequate, reflecting our expectation that the group's sources of liquidity will cover
its uses by more than 1.2x over the next 12 months. We also expect the company's net sources to remain positive even
if EBITDA were to decline by 15%.
Also supporting the group's liquidity is its sound relationships with banks as well as its generally high standing in credit
markets. Chorus has accessed funding in the domestic New Zealand and euro medium-term note markets.
At June 30, 2019, we expect Chorus to have the following sources and uses of liquidity over the 12 months ending
June 30, 2020:
Principal Liquidity SourcesPrincipal Liquidity Uses
• Available cash of about NZ$273 million;
• Cash FFO of NZ$450 million-NZ$480 million;
• Funds received from CFH and other government
funding of NZ$190 million to NZ$200 million; and
• Undrawn bank facilities of about NZ$550 million.
• Debt maturing of about NZ$677 million;
• Capital expenditure of around NZ$700 million; and
• Dividend of 24 cents per share with a dividend
reinvestment plan.
Debt maturities
As of June 30, 2019 (mil. NZ$):
• Current portion of long-term debt: 677
• Debt due in second year: 400
• Debt due in third year: 0
• Debt due in fourth year: 0
• Debt due in fifth year: 784.5
• Thereafter: 500
Total debt: 2,361.5
Covenant Analysis
We expect Chorus to maintain sufficient headroom against its covenants, which include net debt to EBITDA of less
than 4.75x in its syndicated bank facilities.
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Chorus Ltd.

Environmental, Social, And Governance
We view regulatory and social risks as key to our analysis of Chorus' environmental, social, and governance (ESG)
factors.
Chorus has an important telecommunications service obligation (TSO), established through an agreement under
the Telecommunications Act between the Crown and a TSO provider. Under the TSO, Chorus must maintain
certain coverage and service on the copper network in New Zealand.
Chorus' supply chain carries risks and requires the company to monitor and manage different parts of the supply
chain. In April 2019, Chorus released an independent review, after breaches of employment law were identified
among a number of small businesses subcontracted by two of Chorus' service companies. While there were no
allegations that implicated Chorus directly, the Labour Inspectorate identified allegations of poor treatment of
migrant workers among Chorus' subcontractors' workforce. Chorus has put a number of structural improvements
in place and is working with service companies to create a fairer supply chain, including introducing appropriate
safeguards. Following an audit of all of Chorus' subcontacting companies, 38 subcontractors have ceased work on
Chorus' network.
We view environmental exposure as not a material ratings driver. Chorus is addressing the issue through its
greenhouse gas emission and e-waste management programs.
We assess Chorus' management and governance as prudent, given our assessment of the company's operating
strategy and corporate governance architecture.
Issue Ratings - Subordination Risk Analysis
Capital structure
As of June 30, 2019, Chorus' capital structure consisted of a NZ$550 million undrawn revolving credit facility,
NZ$1,462 million medium-term notes, NZ$900 million New Zealand domestic bonds, and debt securities from CFH,
which we treat as debt.
Analytical conclusions
We rate Chorus' debt at 'BBB', in line with the issuer credit rating, given that no significant elements of subordination
risk are present in the capital structure.
We treat the equity securities as 100% equity given that they are subordinated to all creditors of Chorus. Dividends are
optional, mandatorily deferrable, and will not be paid initially.
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Chorus Ltd.

Reconciliation
Table 3
Reconciliation Of Chorus Ltd. Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. NZ$)
--Fiscal year ended Jun. 30, 2019--
Chorus Ltd. reported amounts
DebtEBITDA
Operating
income
Interest
expense
S&P Global
Ratings' adjusted
EBITDA
Cash flow from
operations
Capital
expenditure
Reported2,447.0636.0243.0172.0636.3496.0810.0
S&P Global Ratings' adjustments
Cash taxes paid--------(3.0)----
Cash taxes paid: Other--------------
Cash interest paid--------(129.0)----
Reported lease
liabilities
254.0------------
Accessible cash and
liquid investments
(273.0)------------
Capitalized interest------4.0(4.0)(4.0)(4.0)
Share-based
compensation expense
--0.3----------
Nonoperating income
(expense)
----10.0--------
Debt: Foreign
currency hedges
125.0------------
Total adjustments106.00.310.04.0(136.0)(4.0)(4.0)
S&P Global Ratings' adjusted amounts
DebtEBITDAEBIT
Interest
expense
Funds from
operations
Cash flow from
operations
Capital
expenditure
Adjusted2,553.0636.3253.0176.0500.3492.0806.0
Ratings Score Snapshot
Issuer Credit Rating
BBB/Stable/--
Business risk: Strong
•Country risk:Low
•Industry risk:Intermediate
•Competitive position:Strong
Financial risk: Significant
•Cash flow/leverage:Significant
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Chorus Ltd.

Anchor: bbb
Modifiers
•Diversification/portfolio effect:Neutral (no impact)
•Capital structure:Neutral (no impact)
•Financial policy:Neutral (no impact)
•Liquidity:Adequate (no impact)
•Management and governance:Satisfactory (no impact)
•Comparable rating analysis:Neutral (no impact)
Stand-alone credit profile : bbb
Related Criteria
• General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Dec. 16, 2014
• Criteria | Corporates | Industrials: Key Credit Factors For The Telecommunications And Cable Industry, June 22,
2014
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global
Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale
client (as defined in Chapter 7 of the Corporations Act).
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Chorus Ltd.

Business And Financial Risk Matrix
Business Risk Profile
Financial Risk Profile
MinimalModestIntermediate
Significant
AggressiveHighly leveraged
Excellent
aaa/aa+aaa+/aa-bbbbbb-/bb+
Strong
aa/aa-a+/aa-/bbb+
bbb
bb+bb
Satisfactory
a/a-bbb+bbb/bbb-bbb-/bb+bbb+
Fair
bbb/bbb-bbb-bb+bbbb-b
Weak
bb+bb+bbbb-b+b/b-
Vulnerable
bb-bb-bb-/b+b+bb-
Ratings Detail (As Of November 19, 2019)*
Chorus Ltd.
Issuer Credit RatingBBB/Stable/--
Senior UnsecuredBBB
Issuer Credit Ratings History
03-Dec-2014BBB/Stable/--
22-May-2014BBB/Negative/--
05-Nov-2013BBB/Watch Neg/--
*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable
across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.
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