Moody's may cut Hong Kong Telecommunications

Moody's Investors Service said it placed under review for possible downgrade the Baa2 ratings for Hong Kong Telecommunications Ltd. and all entities irrevocably and unconditionally guaranteed by it.

PCCW Ltd. is the 100% shareholder in HKT Group Holdings Ltd., which in turn wholly owns Hong Kong Telecommunications.

The downgrade review follows news of PCCW's 2010 financial results which, while improving at the core business level, were lower than expectation and also saw a failure to reduce leverage year-on-year, Moody's said.

The agency said it expects that, as per the plans for corporate restructuring and listing of HKT Group in 2008, PCCW would retain majority control of any spun-off entity and that any funds received would be used for debt reduction at the HKT level.

While this deal is far from final and the ultimate capital structure of the HKT Group business trust unknown, Moody's said it does have concerns regarding the likelihood of high shareholder returns given that business trusts typically pay out all surplus cash flow net of what is required to run the underlying business efficiently.

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