Fitch Downgrades TalkTalk’s Long-Term Issuer Default Rating to B-
American credit rating agency Fitch has downgraded TalkTalk’s Long-Term Issuer Default Rating to B- from B and put the UK broadband ISP on Rating Watch Negative (RWN). The move follows recent confirmation that the internet provider, under pressure from its debts, is to be broken up and sold off in pieces (here).
The latest Fitch Ratings report states its belief that the group’s on-net base has “continued to decline consistently“, while their recent inflation-adjusted price increases of CPI plus 3.7% “have yet to bring a meaningful benefit” for revenue and EBITDA, but they may still bring some benefit further down the road.
“[TalkTalk Group] is in a tough trading environment. Vulnerability to high input costs from inflation-linked Openreach wholesale costs and operating cost inflation are exacerbated by a declining consumer base and price competition, limiting its ability to fully pass on inflation and depressing its margins,” added the report.
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Apparently, TalkTalk plan to monetise some assets (e.g. selling IP addresses) to help tackle their problems, although Fitch expects them to remain structurally reliant on their Revolving Credit Facility (RCF) to fund operations over the next 3 years and notes that the ISP is also in advanced negotiations to sell their B2BDirect business (expected to conclude within the next 2 months).
“Although the sale will ease short term liquidity pressure, we believe further asset monetisation or equity support is necessary to refinance and enable TTG to execute its strategic priorities,” added Fitch.
A Spokesperson for TalkTalk told ISPreview:
“TalkTalk Group is demerging its Wholesale and Consumer divisions to allow the two businesses to work independently, and invest and grow in their respective markets. The shareholders are excited about the potential for both businesses and fully supportive of their future and refinancing.”
However, Fitch’s report did note that TalkTalk also had additional options to improve its business under a more sustainable capital structure, such as their plans for placing a greater focus on customer retention and upselling speed tiers with full fibre (FTTP) following the transition to Openreach’s new Equinox 2 price discounts.
The provider’s Ethernet business, at least for so long as it remains a part of the group, also continues to show a “good growth trajectory and generates significantly higher average revenue per user“. An increase in the alternative network (altnet) mix on their Wholesale platform may thus provide a tangible opportunity to expand coverage and mitigate the impact of higher wholesale fibre costs (i.e. altnets are reportedly pricing one-third lower than Openreach). But that does depend on the rate and scale of altnet build, which is currently the subject of some turbulence.
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Suffice to say, the next few months are going to be a busy period for TalkTalk, as it tries to claw its way back toward some stability.
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook, BlueSky, Threads.net and Linkedin.
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The problem TT have is that the idea of doing better on retention and upselling flies against the very core of their business model, reputation, and the quality of the customer base. TT were always focused on being cheap and cheerless. They’re not going to go from being the Dacia of telecoms to being Audi – it simply can’t be done. So I reckon Fitch have got the negative outlook right, and to translate the finance market mumbo-jumbo, they’re saying there’s a material risk that the business will run out of cash and the value of any assets will be below the debt.
Which leads on to a wider conundrum – the UK telecoms market is evolving rapidly and massively – 5G developments in mobile, OR FTTP racing ahead, altnets sprouting like fungus, data usage going through the roof, the advance of digital voice products continues apace, . Yet the business outlook seems pants across the market – BT’s market cap is arguably worth less than their own scrap copper, many of the altnets are struggling, TT appear to be about to go under, even VM’s broadband business (taking O2 out of the equation) is and always has performed badly.
Perhaps there’s a big question for Mark as to why UK telecoms seem such a poor equity investment? Is competition undermining the ability of companies to make a return? What would prices look like if companies were making a credible return on capital employed? What would happen to Openreach pricing is they continue to lose market share, yet remain the only supplier obligated with USO and urban/rural cross subsidy commitments?
What competition Andrew?
Visit any price comparison website to find out. Even VM, who for decades had a near monopoly of speeds above 80 Mbps never managed to get their ARPU over fifty quid a month. Even if there’s only one player offers higher speeds in a particular region, there’s still a low ceiling of market tolerance for higher prices.
How will the break up of TT effect Cityfibre? TT are one of their bigger customers.
It means Cityfibre’s sales and marketing department will have to pull their finger out and find some more customers to sell their network to,
Greg Mesh is going to start kicking some butts.
Not sure it will effect it at all? They’re breaking up the divisions but still operating.
I hear a lot of their claw back will be migrating OR customers into CF enabled areas where possible for cheaper wholesale pricing. In non-CF areas take advantage of equinox 2 wholesaling prices.
If TalkTalk are struggling under the weight of their debts and have around 10% total market share, how are the altnets going to make any money.
They won’t be able to, that’s why consolidation is inevitable.
Market share has little direct bearing on profitability. It all depends on what your underlying costs are, what you can routinely charge customers, and what part of the growth cycle they are at. Altnets aren’t comparable to TT, although I agree that the finances of both look difficult, and altnet consolidation is already starting.
TalkTalk don’t have their own access network. A fair chunk of their revenue goes straight to Openreach for line rental, cablelinks and collocation.
Altnets do own their own access networks. They pay for PIA rental only which is a considerably lower cost than the Openreach GEA products. They also don’t have the costs of thousands of LLU exchanges with DSLAMs in them, they don’t serve the entire country.
Apples and oranges.
Even further into junk status. Not great.