Chorus keeps upgrade hopes alive after NZ$683m debt reclassification

NZ$683 Million Reclassification Raises the Leverage Test

Chorus Limited (ASX:CNU) has absorbed a sizeable accounting blow to its credit metrics without losing its investment-grade rating. S&P Global Ratings confirmed Chorus at BBB with a positive outlook after changing the treatment of NZ$683 million of National Infrastructure Funding and Financing securities from 100% equity to 100% debt.

The change followed the New Zealand government’s August sale of the securities to domestic and international institutional investors. S&P had based its earlier equity treatment on the securities being held by, or on behalf of, the government. That condition no longer applies, lifting S&P-adjusted debt and pushing its forecast FFO-to-debt ratio down from 17% before the sale to slightly above 13% over the next two years.

Positive Outlook Depends on a Narrow Financial Buffer

S&P’s report is an update rather than a new rating action, but its message is consequential: Chorus remains within reach of a BBB+ rating over the next 12 months, provided FFO-to-debt stays above 13% and the company continues to follow what S&P considers supportive financial policies.

S&P forecasts adjusted debt rising from NZ$3.3 billion in fiscal 2026 to NZ$4.07 billion in fiscal 2027 and NZ$4.21 billion in fiscal 2028. Over the same period, it expects revenue to grow from NZ$1.029 billion to NZ$1.09 billion and EBITDA to increase from NZ$726 million to NZ$770 million. The forecast also assumes annual capital expenditure of NZ$370 million to NZ$380 million and a fiscal 2027 dividend of 62 New Zealand cents per share, subject to no material adverse change in circumstances or outlook.

The scale of the buffer matters. S&P’s forecast FFO-to-debt ratio is 13.3% for fiscal 2027 and 13.2% for fiscal 2028, before falling to 12.7% in fiscal 2029 in its longer-range estimates. A materially weaker regulatory outcome, debt-funded shareholder returns, higher growth spending or acquisitions could instead push the outlook back to stable.

PQP3 Becomes the Main Regulatory Catalyst

Chorus has regulatory certainty through the end of 2028 under the current Price-Quality Path 2 regime, which carries a NZ$4.1 billion revenue cap for the four years to December 2028. S&P expects the next period, PQP3, to run for five years from January 2029, with the stability of the regulated asset base, WACC assumptions, allowed expenditure and resulting revenue path all relevant to the upgrade case.

That regulated framework remains the centre of the credit story. S&P expects fibre-based revenue to account for 84% to 87% of total revenue over the next two years as Chorus retires its remaining copper network by 2028. The company’s earlier fibre growth and copper retirement program is therefore relevant to the transition, although S&P continues to identify wireless fixed access and satellite services as longer-term substitution risks.

Capital Structure Offers Support but Leaves Little Room for Error

S&P describes Chorus as having a near-monopoly over New Zealand’s fixed-line wholesale access network, predictable regulated cash flows and adequate liquidity. It estimates that liquidity sources will cover uses by about 1.2 times in the 12 months to June 2027, including around NZ$200 million of cash, NZ$450 million of undrawn committed bank facilities and NZ$500 million to NZ$540 million of funds from operations.

The agency’s treatment of Chorus’ earlier NZ$170 million capital notes offer also remains part of the capital picture: the subordinated notes receive 50% equity credit and carry a BB+ issue rating. That support is offset by the NIFF reclassification, leaving the company’s prospective upgrade dependent less on a single earnings surge than on steady regulated cash flow, restrained capital allocation and a constructive PQP3 outcome.