'Lack of meaningful deleveraging'

EIRCOM has had its credit rating downgraded by Moody's, which says it is not reducing its debt fast enough and lacks strategic direction.

Eircom, owned by Singapore firm STT, could breach its banking covenants in the near term, Moody's said. The agency cut its rating on ERC Ireland Finance, Eircom's parent company, to B2 from B1.

"While Eircom generates positive free cash flow of around €50m per annum, Moody's notes that this has been primarily driven by drastic reductions in [operating and capital expenditure] rather than improvements in the top line [revenue growth]. In Moody's view, sustained [operating and capital expenditure] cuts could lead to long-term loss in competitiveness, as Eircom competes with stronger and better capitalised players such as Vodafone or Telefonica O2," Moody's said in a statement.

The agency said it was concerned about the combination of a "lack of meaningful deleveraging as a result of a weakening operating performance" and about the "overall strategic direction of the company and its long-term capital structure".

"As a result of the lack of meaningful deleveraging, Moody's believes Eircom will face increasing challenges in complying with financial covenants," it said. "If this occurs, Eircom may require an equity injection to rebalance its capital structure but the company's strategic shareholder, STT Communications, has not yet given any indication of its intentions regarding Eircom's longer-term capital structure."

Eircom last week said revenue in the nine months to the end of March fell 8.6% to €1.39bn and earnings slid 3.3%.