S&P Reduces Valentia's Credit Rating

LONDON, March 2, 2004--Standard & Poor's Ratings Services said today it lowered its long-term corporate credit rating on Valentia Telecommunications upc (Valentia)--the 100% owner of former incumbent Irish fixed-line telecommunications operator eircom Ltd. (eircom)--to 'BB+' from 'BBB-'. The rating action follows the announcement of a flotation of eircom Group Ltd., the 100% owner of Valentia, and the earlier acceptance by bondholders of Valentia and related entity eircom Funding upc, of a request to allow the Valentia group to pay higher dividends according to an amendment to its bond documentation. In addition, Standard & Poor's removed its ratings on Valentia and related entities from CreditWatch, where they were placed on Jan. 28, 2004. The outlook is stable.

At the same time, the ratings on the senior unsecured and senior subordinated notes issued by Valentia and eircom Funding were lowered by two notches to 'BB-' from 'BB+'. The further downward notching of the notes takes into account the structural subordination of these notes to priority obligations at the operating level and refinancing of the current outstanding secured bank loan with a new secured loan.

Valentia has obtained from its bondholders consent to pay dividends up to an amount of EBITDA less consolidated interest and €350 million on an annual basis. Although more modest dividend payments are possible, Standard & Poor's nevertheless believes that credit protection afforded to bondholders will be weakened over the next nine years. At Dec. 31, 2003, Valentia's lease-adjusted net debt was €2.2 billion ($2.7 billion).

"The rating actions primarily reflect the change in Valentia's financial policy," said Standard & Poor's credit analyst Michael O'Brien. "Given the group's high leverage and moderate free cash flow expectations over the next few years, and despite some equity proceeds from current owners, the payment of significant dividends is deemed aggressive."

Valentia is expected to improve its debt-protection measures over the coming years, however, thus conforming with both its debt-repayment schedules and senior-debt covenants, while paying moderate dividends.

The group is also expected to improve its free operating cash flow and continue where possible to improve capital and operating efficiency, mitigating the margin pressure driven by regulatory actions and competition from alternative service providers and fixed-to-mobile substitution.

Standard & Poor’s