BT's profit warning last week has resulted in ratings agency
Standard & Poor downgrading the company's credit rating from
"stable" to "negative".
Such downward ratings can be the kiss of death for major
companies, seen recently by the experience of British banks forced
to go cap in hand to the government after seeing their available
credit drying up.
BT has spent hundreds of millions of pounds on snapping up IT
services companies over the past two years, but its BT Global
Services arm is not chipping in as expected.
Standard & Poor said of its new BT rating, "This action
follows the release of BT's trading update indicating a weaker
EBITDA (earnings before interest, taxes, depreciation and
amortisation) and profit margin performance at its Global Services
division for the second quarter of financial 2009."
Standard & Poor credit analyst Michael O'Brien said, "The
EBITDA outlook for financial 2009, which arises as a result of a
weaker-than-expected 7%-8% EBITDA margin at BT Global Services,
means that our earlier expectations of annual free operating cash
flow generation of about £1.5bn will likely not be met.
"In addition, pressure could manifest itself through the risk of
a negative outcome from the upcoming triennial pension review,
which, if unfavourable, could result in significant additional
funding requirements, as in previous years."
He said this could lead to weaker credit metrics than those
posted by BT at the end of the quarter ended 30 June, which were
already above "long-term expectations for the ratings and do not
provide rating headroom for further deterioration".
Because of its lack of cashflow, BT cancelled a £2.5bn share
buyback plan in July.
BT has warned of higher capital expenditure costs and is
currently trying to build a TV on demand service - BT Vision - to
rival the services offered by the likes of Virgin Media and
Sky.