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Friday, 11 May, 2001, 13:21 GMT 14:21 UK
BT hit by double whammy
BT Graphics
British Telecom's planned sale of its online business directory service is in the balance after the UK regulators ordered Yell to cut its advertising prices.

Credit rating downgrade: What does it mean?

A lower credit rating means it is marginally more likely that a company will default on its debt.

The company will therefore have to pay higher interest rates on its loans to compensate lenders for the additional risk.
And in a second blow to BT, two leading ratings agencies have downgraded the troubled telecoms firm's credit worthiness.

The sale of Yell, which was expected to be completed this week, will now be delayed, or perhaps even called off.

The credit rating downgrades are expected to cost BT an estimated 30m in extra interest payments.

Regulator intervenes

Following the intervention by the UK's Office of Fair Trading (OFT), two private equity firms, which had been expected to buy Yell this week, are reconsidering their 3bn offer.

The regulator has asked BT to cap its annual advertising fees for the next four years at RPI minus 6%.

This means Yell's prices can only rise at a rate 6% below inflation.

If inflation remains low, this would in effect mean prices would have to be reduced.

Yell off

Analysts believe the move may have shaved 1bn off Yell's value.

But, more importantly, the OFT's decision "will affect not just the price, but it also puts into question whether [the buyers] would want to do a deal, frankly", according to a source close to the sell-off talks between BT and the private equity firms Apax Partners and Hicks, Muse, Furst & Tate.

The sale of Yell has been held up by an investigation by the OFT into the market for classified directory advertising market.

And the OFT's decision turns "a business which has been growing historically into a business which will not grow going forward" a source familiar with the disposal talks said.

Yell is just one of many BT assets that are up for sale as the telecoms group is seeking to slash its massive debts.

Credit rating

The ratings agencies Moody's Investors Service and Standard & Poor's both lowered BT's credit rating following news of its restructuring plan.

But while S&P only cut its credit rating from A to A-, Moody's went a lot further and slashed BT's rating from A to BBB+.

BT accepted S&P's relatively modest reduction, but described the Moody's cut as "disappointing".

Analysts, too, were perplexed by the move.

"It seems quite harsh," said West LB Panmure's telecoms analyst Mark Davis.

"It is not the end of the world, but it is kicking the company when they had just announced their restructuring plans."

The view was widespread among City analysts.

BT shares were down 14p at 514p at midday.

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See also:

10 May 01 | Business
BT posts 2.8bn quarterly loss
02 May 01 | Business
BT to quit London HQ
01 May 01 | Business
BT retreats from Japan and Spain
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