Spectrum cost could hit telcos' ratings

The cost of spectrum is likely to put Telstra and SingTel's credit ratings under pressure as telcos need to fork out billions to pay for the radio frequency assets, Moody's Investors Service warns.

The government is auctioning spectrum as the country switches off the analog TV signal and makes the space available for mobile phone operators. It is expected to raise billions from the sales.

Moody's says the cost of spectrum has "the potential to narrow the financial cushion within Telstra's A2 rating". The ratings agency expects Telstra to pay about $1.7 billion for the maximum allocation of spectrum.

But Moody's expects pressure on the telco to be short term, given the company's large cash reserve and strong cash flows. It expects spectrum cost to exert greater pressure on SingTel's balance sheets.

Telstra recently issued $1.3 billion of eurobonds to finance the cost of spectrum.

Telcos need more spectrum to carry data on mobile networks and are struggling under increasing demand from consumers. The frequency up for auction - 700MHz - is occupied by analog television signals. It is valuable because it is efficient and works well over long distances.

Meanwhile, Telstra has won a $1.1 billion contract with the Department of Defence to provide telecoms services to the defence force.

Telstra chief executive David Thodey said it was the largest customer undertaking in the company's history and would support military operations in Australia and overseas.

"We will create 350 new positions to help serve the contract, including recruiting some of the nation's leading IT, network and security experts," he said.

Telstra shares closed at $4.79, down slightly from Wednesday's near five-year high of $4.82.