DBRS Confirms COLT Telecom Group plc’s Ratings at B

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of COLT Telecom Group plc (“COLT” or the “Company”) at B. All trends remain Stable.

DBRS acknowledges COLT’s current ratings will have a much stronger underpinning after the Company executes on its intention to issue £300 million in new equity to further reduce gross debt and strengthen its financial profile. However, the degree of competition and business risk that the Company faces has not abated, with the Company recently taking a £247.2 million fixed asset writedown, as pricing pressures and overcapacity conditions continue to restrain cash flow from operations growth.

Therefore, despite the expected improvement in COLT’s capital structure and reduced interest costs, the expectation of continued pressure within COLT’s markets will likely restrict further rating improvement until the Company can achieve a profitable business model along with a more meaningful level of free cash flow generation. This may be difficult if the current competitive environment persists, although COLT intends to improve its performance through shifting more of its revenues to higher-margin data and value-added services and trying to increase the percentage of traffic that remains on its own network.

However, DBRS believes that the Company’s current switched revenue base could face accelerated revenue and EBITDA pressure with the proliferation of lower-cost Voice over Internet Protocol (VoIP) offerings from the incumbent telcos and other operators gaining traction. Also, DBRS believes COLT could face further competitive disadvantages versus the incumbent telcos, as corporate customers look more towards operators who provide converged fixed-line and wireless services over their own networks.

For COLT’s ratings to improve from current levels, the current industry situation of excess supply and pricing pressure would need to be alleviated. DBRS believes industry consolidation is needed to resolve these issues, although it appears that COLT would not act as a consolidator. Therefore, without any near-term changes in the environment, COLT will likely continue to face low revenue growth prospects, with cash flow improvements mainly attainable from further cost reduction initiatives. As a result, free cash flow levels may not improve materially above the modest amount generated in 2005.

Note:
These ratings are based on public information.