Telstra hangs up on debt as it dials in credit rating

Telstra has been aggressively paying down debt as it faces a potential cut in its prized A credit rating.

A Telstra spokeswoman yesterday confirmed that the company was taking steps to repay a 10-year bond maturing on March 30.

"We have debt maturing at various times over the coming years and will finance it out of the ordinary course of the business," she said.

Telstra announced a steep decline in revenue and kept its dividend steady when it delivered its half-year results last week, but also reported free cash flow of $2.62 billion. Analysts expect this to reach $6 billion by the end of the financial year.

Telstra's credit rating has dropped from AA to A in the past 10 years, and ratings agency Moody's reiterated the possibility of a downgrade for Telstra following last week's results.

In present market conditions, Telstra would have to pay at least 200 basis points above the benchmark if it issued a 10-year bond this year, compared with the 35 extra basis points it paid in 2000.

But while the company will have no trouble repaying the 10-year bond, it may not have had a choice, according to analysts.

"There would be no appetite for a 10-year bond for Telstra given the uncertainty that surrounds it now," the managing director of ADCM Services, Philip Bayley, said.

Telstra faces changes in regulation and uncertainty over the national broadband network, and last week announced a rapid decrease in revenue from fixed-line and mobile services.

It has already repaid $1.2 billion of debt this financial year but, according to data from Bloomberg, more than $4.5 billion worth of debt and Telstra bonds is due over the 2010 and 2011 calendar years.