Standard and Poor's has downgraded BT's credit rating to triple B minus from triple B, over concerns its plan to plug a gap in its pension fund could affect its cash liquidity.
The credit rating company is concerned that BT’s plan to pay £525 million (€595.8 million) per year into its pension fund over the next three years could constrain the financial flexibility of the group, FT.com said. BT has a £9 billion pension fund deficit.
S&P also believes the payments will not be sufficient to reduce the telco’s debt to a more manageable level.
BT predicts it will have free cash flow of £1.7 billion by the end of the year, and will be left £700 million after dividend payouts and the pension scheme.
The company said the lower rating would increase the cost of its interest payments by £6 million a year.
BT shares tumbled 4.4%, the largest decline on the FTSE 100, on the back of the downgrade according to The Guardian said.
However, the share price recovered after rumours the company is planning to divest its Italian wireline division to help pay the pension fund deficit. The company could raise over €500 million through the sale, analysts told FT.
Swisscom has been pegged as a potential buyer, and has €700 million available for acquisition, they added.
Standard & Poor's meanwhile has downgraded another telecom operator – India's Bharti Airtel – this time on concern Bharti's $9 billion (€6.59 billion) acquisition of Zain Africa could increase the company's credit risk.
The debt ratings agency has put the company on Credit Watch on expectations of a “significant deterioration in Bharti’s cash flow protection.”
It also expects a weakening of the company’s business risk profile if it acquires Zain Africa.
A debt-funded acquisition, combined with 3G auction costs in India could increase Bharti’s pro forma consolidated debt to ebitda ratio from 1.4x in calendar year 2009, to 3x for the year ending March 2011, said S&P.
Last week, Bharti offered $10.7 billion (including debt), or $9 billion net, for Zain’s assets in Africa (excluding operations in Morocco and Sudan).
Bharti is conducting due diligence on the assets, with its exclusive deal negotiation period to end on March 25.
Bharti proposes exporting its successful Indian business model centred around infrastructure sharing to Zain’s African businesses.
It also plans to drive up network utilisation and usage by slashing tariffs, said the Economic Times.