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Bulletin: Telstra Trims Debt Headroom With Digicel Pacific Purchase

SINGAPORE (S&P Global Ratings) Oct. 26, 2021--S&P Global Ratings today said that Telstra Corp. Ltd.'s acquisition of Digicel Pacific will marginally erode its leverage headroom at the current rating level (A-/Stable/A-2). Our assessment of Telstra's business risk remains largely unchanged.

The purchase of the South Pacific-based mobile operator will be partially debt-funded, weighing on Telstra's leverage. The US$1.6 billion acquisition (plus earn-outs) will be funded by US$270 million of equity from Telstra and US$1.33 billion from the Australian government's Export Finance Australia agency (via a US$720 million nonrecourse 10-year loan and US$610 million of equity-like capital).

Telstra's financial commitment to the Digicel Pacific transaction is relatively modest and is done on favorable terms, in our view. Nonetheless, the acquisition follows Telstra's recent 49% sell-down of its mobile tower portfolio--a transaction that we consider is akin to a sale and lease-back transaction--and a proposed A$1.35 billion in share buybacks over the next year. Accordingly, we expect the impact of these transactions to cause Telstra's adjusted debt to EBITDA to approach, but not exceed, our 2.5x downgrade trigger in fiscal 2022 (year ending June 30, 2022).

In our opinion, the acquisition is unlikely to materially increase country and regulatory risks for Telstra. About 80% of Digicel Pacific's EBITDA is from Papua New Guinea, which we view as a materially higher-risk market than Telstra's home market of Australia. Nonetheless, Telstra's earnings exposure will be limited; we estimate Digicel Pacific's EBITDA will represent less than 5% of the broader Telstra group. Similarly, we do not consider that the acquisition provides meaningful geographical diversification for Telstra. We also understand Telstra has obtained political-risk insurance to mitigate fallout from political and regulatory-intervention risk over the next six years, if any such events occur.

On Oct. 25, 2021, Telstra announced the purchase of the Digicel business in the South Pacific region, in partnership with the Australian government. The transaction is subject to government and regulatory approvals, and is expected to complete in the first quarter of calendar 2022. The investment will be held by Telstra International under Telstra's new corporate structure.

This report does not constitute a rating action.

Primary Credit Analyst:Yijing Ng, Singapore (65) 6216-1170;
Secondary Contact:Richard P Creed, Melbourne + 61 3 9631 2045;

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