Bidding in next week’s Digital Dividend auction is crucial for Telstra and SingTel Optus to stay competitive even though it is likely to negatively impact their credit ratings, according to a financial analyst at Moody’s.
"It will be critical for Australian telecom giants to invest in additional spectrum well ahead of anticipated demand in order to compete effectively," said Moody’s senior credit officer, Ian Lewis.
"A failure to maintain service quality and invest in sufficient spectrum will hurt their business profiles in the medium- to long-term, as capacity reductions and network congestion lead to the degradation of service quality."
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The Australian government on 23 April will auction spectrum in the 700MHz and 2.5 GHz radiofrequency bands that can be used for 4G networks in rural and urban areas. Lewis said that the lower frequency 700MHz spectrum is especially desirable.
"Subject to the cost of acquisition, the efficiency of the spectrum and the superior speed possible through 4G make the deployment of the 700 MHz spectrum in particular, attractive for key business sectors such as mining, as well as for retail customers who are increasingly driven by fast download speeds for applications such as video streaming," he said.
Vodafone Hutchison Australia has said it most likely will not bid for the 700MHz spectrum because it already has a strong reserve of 1800MHz spectrum to support its 4G expansion.
Optus will likely feel the negative impact to its credit rating for a longer period of time than Telstra, Moody’s said. Telstra has high cash holdings and large internal cash flows, it said.
"SingTel Optus has less flexibility at its rating level, although it could deploy capital management initiatives to offset the pressure on its financial profile," it said.
The extent of damage to the telcos’ credit ratings "will depend on the degree to which they fund their spectrum purchases via debt and the amount of spectrum they purchase at the government auctions," said Lewis.
"The acquisition of spectrum will likely be partially debt-funded, depending on ultimate cost," said Lewis. "The acquisition of spectrum will be most challenging for SingTel Optus' financial profile, while it could also narrow the financial cushion within Telstra's A2 rating."
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