Citing concerns about debt-laden PCCW's declining fixed-line business, credit agency Moody's Investors Service downgraded PCCW-HKT Telephone's credit rating yesterday in a move likely to increase annual interest costs on nearly US$3 billion in bonds. Moody's lowered its rating on senior debt for the dominant Hong Kong telephone carrier to Baa2, from Baa1, while maintaining a stable outlook on PCCW. The downgrade, which means an additional interest expense of US$2.5 million a year, has spoiled the company's quest for a higher credit rating after a series of refinancing exercises last year which prolonged most debt maturity to after 2006. 'Naturally we are disappointed. We don't think this adequately reflects all the good work we have been doing compared with our global peers,' a spokesman said. Moody's lowered PCCW-HKT's debt rating a notch on worries over declining revenue in a competitive market. 'HKT experienced more intense competition than had been expected, in addition to a softening in the Hong Kong economy. This has resulted in downward pressure on fixed-line subscribers, tariff volumes, and pricing,' Moody's said. The Office of the Telecommunications Authority said this week almost 100,000 telephone numbers switched among networks in the first quarter. One analyst said about 94 per cent of the numbers were believed to have been switched away from PCCW. Last year, the company lost 351,000 lines, dropping its market share to 82 per cent from 89 per cent in 2001. Its high debt level limits its capacity to offer lower prices to win back fixed-line market share. At the end of last year, it had $4.2 billion in net debt and it has set a goal of reducing debt by $1 billion by the end of 2005. In a US$1 billion bond offering in 2001, the company said it would need to pay an additional 0.25 per cent per annum in interest if its credit rating fell below Baa1. Fixed-income analysts such as ING's Eden Wong and Morgan Stanley's Michael Lam said yesterday they expected PCCW would now have to pay 25 basis points more on its existing 7.75 per cent US dollar bonds due 2011, costing it an extra US$2.5 million.
