Telstra has had its "A" credit rating placed on negative outlook by credit rating agency Standard & Poor's to reflect the "downside risks" associated with its capital allocation review.
At the company's investor day on Thursday, the telco announced it was reviewing its entire capital allocation strategy "taking into consideration the long term business and financial profile of Telstra".
The agency took particular notice of Telstra's revision of its commitment to maintain an "A" rating to remaining in the "A band", implying it would tolerate a one notch downgrade that may result from its decision to return more capital to shareholders.
"A key ratings consideration will be whether the outcome results in a relaxation of existing balance sheet settings."
The six to 12 month review will look at the the best use of NBN payments to find to find the "most effective way of maximising long term shareholder value from its NBN cash flows".
The review will also examine long term capex post-NBN, and investment decisions including M&A; criteria and "take into consideration shareholder returns including dividends, buy-backs and other forms of return".
S&P; analyst Graeme Ferguson said the agency could downgrade Telstra if "the company relaxes its stated balance-sheet settings or if changes to the structure or allocation of ongoing high-quality NBN payments materially dilute Telstra's strong business risk profile."
"We could also lower the rating if the competitive environment in mobile services intensifies significantly, substantially deteriorating Telstra's market share or margins."
Telstra has long been a favourite stock among income focused investors because of its relatively high dividend payments. However the stock has fallen by 7 per cent to $4.95 so far in 2016. Even if the company did face a downgrade it remains amongst the highest rated non-financial borrowers in the Australian debt markets. Telstra's five year credit default swaps, a proxy measure of funding , trade at 54 basis points, down from 65 basis points at the start of the year. That compares to about 75 basis point for the big four Australian banks.
