S&P increases Chorus’ credit rating threshold

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

Email: company.secretary@chorus.co.nz





STOCK EXCHANGE ANNOUNCEMENT

31 January 2022


S&P increases Chorus’ credit rating threshold

S&P has released the attached update on Chorus.

The update states that the downgrade threshold for Chorus has been increased to a
debt to EBITDA ratio of 5.0x at the current rating level, compared with a ratio of
4.25x previously.

The long-term rating remains unchanged at BBB stable.

Authorised by:
David Collins
Chief Financial Officer


ENDS

For further information:

Steve Pettigrew
Head of External Communications
Mobile: +64 (27) 258 6257
Email: steve.pettigrew@chorus.co.nz

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

---

Research Update:
Chorus Ltd. 'BBB' Ratings Affirmed With Stable
Outlook; Outlook Thresholds Revised With Enhanced
Earnings Predictability
January 31, 2022
Rating Action Overview
- We expect Chorus Ltd.'s earnings to be more predictable and stable following the introduction
of New Zealand's utility-like "building block" regulatory framework, which determines the
annual maximum allowable revenue that the company can earn over each regulatory period on
its fiber network.
- We believe the enhanced earnings quality improves Chorus' underlying creditworthiness and
allows it to tolerate a higher leverage at the 'BBB' rating level. We therefore revised our
downgrade threshold for the company to a debt-to-EBITDA ratio of 5x, from 4.25x.
- On Jan. 31, 2022, S&P Global Ratings affirmed its 'BBB' long-term issuer credit rating on the
New Zealand-based fixed line wholesale-only telecom company. We also affirmed the 'BBB'
long-term issue credit ratings on the company's senior unsecured notes.
- The stable outlook reflects our expectations that Chorus will maintain its solid network position
and earnings, as well as its commitment to maintain financial policies, including a leverage
profile, commensurate with a 'BBB' rating.
Rating Action Rationale
Chorus' earnings are more transparent and resilient, with New Zealand's new regulatory
framework coming into effect in January 2022.The regulatory regime, applicable to Chorus'
fiber network, determines the annual maximum allowable revenue that Chorus can earn over each
regulatory period. The first regulatory period runs from 2022 to 2024 and the New Zealand
Commerce Commission (NZCC) has applied a revenue cap of NZ$2.2 billion for Chorus in the
period. A wash-up mechanism will adjust for any under or over recovery of revenue arising from
differences between projected and actual demand levels. This adds a layer of earnings certainty.
Research Update:
Chorus Ltd. 'BBB' Ratings Affirmed With Stable
Outlook; Outlook Thresholds Revised With Enhanced
Earnings Predictability
January 31, 2022
PRIMARY CREDIT ANALYST
Yijing Ng
Singapore
(65) 6216-1170
yijing.ng
@spglobal.com
SECONDARY CONTACT
Richard P Creed
Melbourne
+ 61 3 9631 2045
richard.creed
@spglobal.com
www.spglobal.com/ratingsdirectJanuary 31, 2022 1

The shift toward becoming a utility-like business, characterized by high predictability of
earnings and low volatility, underpins our view that Chorus can accommodate higher leverage.
Fiber revenues subject to the regulatory regime accounted for a high 60% of Chorus' total
revenues in fiscal 2021 (ended June 30, 2021), and this proportion is expected to rise on the back
of increasing fiber uptake, spurred by demand for faster and more reliable connections. We
estimate that by fiscal 2024, fiber will account for almost three-quarters of Chorus' revenue.
At the same time, we view the residual execution and cost escalation risks associated with the
ultra-fast broadband (UFB) rollout as minimal.The implementation of the new regulatory
framework follows Chorus' transition to operating from the building phase of its fiber network. As
of December 2021, the UFB rollout was 97% complete, with 32,000 premises remaining to pass by
December 2022. As the rollout completes, we expect Chorus' free operating cash flow (FOCF) to
turn positive from fiscal 2023, improving the company's financial flexibility. We project Chorus'
capital expenditure (capex) to drop to NZ$560 million-NZ$580 million in fiscal 2022 from the
NZ$800 million spent in fiscal 2019 during the peak network buildout, and for this to reduce
further to below NZ$400 million by fiscal 2024.
How the regulatory framework stays or changes through subsequent resets will drive the
leverage tolerance parameters for the rating.Despite application of the regulatory framework,
Chorus retains some longer-term exposure to competition from alternative technologies such as
wireless network substitution. Vertically integrated mobile network operators have an incentive to
bypass fixed-line wholesalers in order to capture the full value chain and earn a higher margin. As
a result, fiber uptake could be lower than the company expects. The wash-up mechanism partially
mitigates such risks to earnings. Beyond a single regulatory period, however, these risks are also
somewhat a function of how the regulator responds to material changes in market dynamics
through the regulatory reset periods. Notably, the regulator may choose to move to a price-cap
model within the second regulatory period. We will look for clarity of the regulator's stance as
Chorus move through the first regulatory period.
We view Chorus as committed to maintaining a leverage level commensurate with our 'BBB'
ratings.Chorus has a record of maintaining a disciplined approach to shareholder returns and
financial policy decisions. Chorus is transitioning its distribution policy from being a proportion of
profit to one based on free operating cash flow. This reflects the transition to a regulated entity in
which capex is skewed to stay in business levels. We expect this change will help the company
manage its leverage according to its operating performance and capex cycle. We project Chorus'
debt-to-EBITDA ratio to be 4.0x-4.2x through fiscal 2024. That said, we believe the company may
have a higher leverage appetite in response to the greater revenue certainty stemming from the
introduction of the regulatory regime. Nonetheless, we expect the company to continue to manage
its leverage below our downgrade threshold.
Outlook
The stable outlook reflects our expectation that Chorus' strong network position and enhanced
earnings predictability due to regulation--coupled with increasing FOCF generation and
disciplined approach to capital management--will offset 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 under
www.spglobal.com/ratingsdirectJanuary 31, 2022 2
Research Update: Chorus Ltd. 'BBB' Ratings Affirmed With Stable Outlook; Outlook Thresholds Revised With Enhanced Earnings Predictability

the new regulatory framework. We may further adjust the company's debt capacity at the 'BBB'
rating level, either upward or downward, to reflect our view of the stability of the new regulatory
regime, particularly how the regulator manages medium-to-long term returns, regardless of
market dynamics.
Downside scenario
Downward rating pressure could occur if the ratio of debt to EBITDA is sustained at 5x or more or a
material decline in the group's covenant headroom or liquidity were to occur.
Changes to the new regulatory regime that materially reduce the amount, predictability, and
sustainability of 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 rating momentum to be unlikely over the next few years, given the company's
capital management objectives. It would require Chorus to adopt and adhere to a more
conservative financial policy such that its debt-to-EBITDA ratio remains substantially below 4x.
The establishment of a regulatory track record demonstrating earnings that are sustainable,
highly predictable and resilient to wireless substitution risks could provide incremental debt
capacity at the 'BBB' rating level.
Company Description
Chorus is a provider of telecommunications infrastructure throughout New Zealand. The company
owns most of the telephone lines and exchange equipment in New Zealand and responsible for
building about 75% of the new fiber optic UFB network. The government-backed UFB will cover
87% of the population by the end of 2022.
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, later rebranded as Spark New Zealand prior to the UFB rollout.
Our Base-Case Scenario
Assumptions
- New Zealand's GDP to recover after contracting 1.1% in 2020, with a growth of 5.3% in 2021,
3.0% in 2022 and 2.8% in 2023. The advent of the regulatory regime reduces the impact of GDP
growth as a revenue driver, but inflation could drive up the business' operating expenses.
- Chorus' revenue to be virtually flat in fiscals 2022 and 2023, before rising about 1%-3% in fiscal
2024. The revenue composition will change, however, with fiber-based revenues (fiber
broadband and fiber premium) growing to account for almost three-quarters of revenue by
fiscal 2024, up from about 60% in fiscal 2021. In contrast, copper-based revenues will decline
and contribute to less than 15% of total revenues, down from about 30% in fiscal 2021. This
shift is due to copper-to-fiber migration as consumers seek faster connections.
www.spglobal.com/ratingsdirectJanuary 31, 2022 3
Research Update: Chorus Ltd. 'BBB' Ratings Affirmed With Stable Outlook; Outlook Thresholds Revised With Enhanced Earnings Predictability

- Adjusted EBITDA margin to improve from 68.6% in fiscal 2021 and be 69%-71% over fiscal 2022
to fiscal 2024 reflecting Chorus' cost-reduction efforts.
- Capex of NZ$560 million-NZ$580 million in fiscal 2022. This amount will decline as UFB
network rollout completes by end of 2022, and is projected to be NZ$440 million-NZ$470
million in fiscal 2023 and NZ$370 million-NZ$400 million in fiscal 2024.
- Dividend of 26 cents per share in fiscal 2022 and gradually increase thereafter.
Key Metrics
Chorus Ltd.--Key Metrics*
Mil. NZ$2020a2021a2022e2023f2024f
Revenue growth (%)-1.1-1.30-10-11-3
EBITDA margin (%)67.668.669-7169-7169-71
Capital expenditure679647560-580440-470370-400
Debt to EBITDA (x)4.14.24.0-4.24.0-4.24.0-4.2
FFO to debt (%)18.520.218-2018-2018-20
FOCF to debt (%)-7.8-3.4(3)-(1)2-44-6
*All figures adjusted by S&P Global Ratings. Year ending June 30. a--Actual. e--Estimate. f--Forecast.
Liquidity
We consider Chorus' liquidity to be adequate, reflecting our expectation that the group's sources
of liquidity will cover its uses by about 1.2x over the 12-month period ending June 30, 2022. 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 are 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.
Principal liquidity sources include:
- Cash and cash equivalents of NZ$53 million as of June 30, 2021.
- Undrawn committed bank facilities of about NZ$210 million, expiring beyond 12 months, as of
June 30, 2021.
- Cash funds from operations of NZ$500 million-NZ$510 million over the 12 months to June 30,
2022.
- Funds received from Crown Infrastructure Partners (CIP) and other government funding of
NZ$140 million-NZ$150 million over the same period.
Principal liquidity uses include:
- Debt of about NZ$140 million maturing within a year as of June 30, 2021.
- Capex of NZ$570 million-NZ$580 million over the 12 months to June 30, 2022.
- Dividend of 26 cents per share over the same period.
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Research Update: Chorus Ltd. 'BBB' Ratings Affirmed With Stable Outlook; Outlook Thresholds Revised With Enhanced Earnings Predictability

Covenants
We expect Chorus to maintain sufficient headroom against its covenants, which include net senior
debt to EBITDA of less than 4.75x and net interest to EBITDA of more than 2.75x.
We project Chorus' net debt to EBITDA to be below 4.25x through 2023, and its net interest to
EBITDA to be comfortably more than 4x over the same period.
Issue Ratings - Subordination Risk Analysis
Capital structure
As of June 30, 2021, Chorus' capital structure consisted of a NZ$140 million revolving credit
facility, €800 million medium-term notes, NZ$900 million New Zealand domestic bonds, and debt
securities from CIP, 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. These securities are provided by the New Zealand
government to support a project of national importance. The securities are deeply subordinated
and dividends are optional, mandatorily deferrable, and will not be paid initially.
Ratings Score Snapshot
Issuer Credit Rating: BBB/Stable/--
Business risk: Excellent
- Country risk: Low Risk
- Industry risk: Intermediate Risk
- Competitive position: Excellent
Financial risk: Aggressive
- Cash flow/Leverage: Aggressive
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)
www.spglobal.com/ratingsdirectJanuary 31, 2022 5
Research Update: Chorus Ltd. 'BBB' Ratings Affirmed With Stable Outlook; Outlook Thresholds Revised With Enhanced Earnings Predictability

- Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile: bbb
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10,
2021
- 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
- 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 23, 2014
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, 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: Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
Ratings Affirmed
Chorus Ltd.
Issuer Credit RatingBBB/Stable/--
Chorus Ltd.
Senior UnsecuredBBB
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings
information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating
action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search
box located in the left column.
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Research Update: Chorus Ltd. 'BBB' Ratings Affirmed With Stable Outlook; Outlook Thresholds Revised With Enhanced Earnings Predictability

www.spglobal.com/ratingsdirectJanuary 31, 2022 7
Research Update: Chorus Ltd. 'BBB' Ratings Affirmed With Stable Outlook; Outlook Thresholds Revised With Enhanced Earnings Predictability
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