An anticipated sharp decline in Eircom's earnings over the next 12 months makes the telco's capital structure unsustainable, ratings agency Moody's warned yesterday.
The agency made the comments as it cut the corporate family rating (CFR) on Eircom's indirect parent, ERC Ireland Finance, to Caa2 from Caa1, and downgraded its probability of default to Caa3 from Caa2.
The latter means that ERC is at substantial risk of default, while firms with a Caa2 CFR rating are judged by Moody's to be of poor standing and subject to very high default risk.
Moody's also downgraded ratings on two tranches of notes issued by Eircom entities and on a €3.3bn senior secured facility. It also placed all the ratings on a negative outlook.
Eircom conceded last week that its earnings decline would accelerate over the next year, while chief executive Paul Donovan said the company was likely to breach covenants within the next three months.
Eircom has hired Gleacher Shacklock, JP Morgan and law firm Linklaters to represent it in negotiations with its senior creditors. Talks with those creditors are due to begin shortly.
Eircom is likely to push for a deal that will result in its majority owner -- Singapore Technology Telemedia and the company's Employee Share Ownership Trust -- injecting new equity into the telco in return for creditors accepting a restructuring of their debt.
"The rating action reflects Moody's expectations that Eircom will implement a debt restructuring exercise in the short term, in light of its expected covenant breach in the next quarter," said Moody's lead analyst for Eircom, Ivan Palacios.
Moody's added that the impending debt restructuring "could be considered a distressed exchange and, by implication, a default" under its methodologies.
Last week, Eircom reported its third-quarter revenue fell nearly 11pc to €407m while adjusted earnings sank 6pc to €160m.
Moody's noted the ratings outlook "could be stabilised" if Eircom was to proactively manage the covenant situation while maintaining its current debt-to-earnings ratio.