OREANDA-NEWS. Fitch Ratings has upgraded Pacnet Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'A' from 'B' and its USD350m 2018 guaranteed senior secured notes to 'A' from 'BB' with Recovery Rating of 'RR1'. The ratings have been removed from Rating Watch Positive (RWP), on which they were placed on 23 December 2014. The Outlook is Stable.

The upgrades follow Telstra Corporation Limited's (A/Stable) announcement on 16 April 2015 that it has completed its acquisition of Pacnet and intends to repay Pacnet's debt as soon as practicable.

Fitch has simultaneously withdrawn Pacnet's IDR following the acquisition and statement by Telstra that it intends to repay all of Pacnet's debt. Fitch will continue to rate Pacnet's notes until they are redeemed, after which Fitch will no longer provide ratings or analytical coverage for Pacnet.

KEY RATING DRIVERS

The rating on Pacnet's notes is now equalised with Telstra's rating. We believe that as Telstra has said it intends to repay Pacnet's debt, the default risk on Pacnet's obligations is the same as that of Telstra, leading to an equalisation of Pacnet's ratings with those of Telstra.

Telstra's rating is driven by its leading market share in Australia's fixed-wire and wireless communications markets; its strong free cash flows relative to competitors that allow it to facilitate growth margins for mobile voice and broadband; payments related to agreements signed with the National Broadband Network Co. (NBN); and the company's conservative capital management. However, Telstra's revenue and EBITDA growth will remain in the low single digits, reflecting the declining fixed-voice revenues from fixed-to-mobile substitution.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for Telstra include:
- Postpaid mobile subscribers' annual growth rate of 3% and average revenue per user (ARPU) of 60 cents in the financial year ending 30 June 2015 (FY15)
- Prepaid mobile subscribers' annual growth rate of 5% and ARPU of 30 cents in FY15
- Fixed-voice revenues declining by 3% per year and fixed broadband increasing by 3% per year
- NBN revenue contribution to total revenue increasing to 3% in FY15 from 1% in FY13
- Capex to revenue ratio of 14% in FY15
- Dividend per share of 30 cents in FY15
- Telstra will repay all of Pacnet's senior debt, as it stated in its release of 16 April 2015.

RATING SENSITIVITIES
The rating on Pacnet's notes is equalised with Telstra's rating. For the ratings of Telstra, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 23 December 2014:

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Telstra's funds flow from operations-adjusted net leverage rising above 1.75x (FY14: 1.8x) on a sustained basis;
- Telstra's free cash flow after dividends turns negative on a sustained basis.

Positive: Given sector-related risks, a rating upgrade is unlikely in the medium term.