Moody's warns may cut Vodafone A3 rating

LONDON, Feb 13 (Reuters) Moody's Investors Service on Tuesday said it might cut its A3 rating on mobile phone giant Vodafone, taking a harsher line on the acquisition of a stake in Hutchison Essar than Standard&Poor's or Fitch Ratings.

Vodafone agreed on Monday to buy the 67 percent stake in Hutchison Essar, India's fourth-biggest mobile phone operator, for .1 billion in cash from Hutchison Telecommunications .

It said net debt could rise as high as 23.3 billion pounds (.22 billion) by March 2007, from 20.2 billion pounds in September 2006.

Vodafone is almost unique among European telecoms operators in having maintained a stable single-A category rating throughout the telecoms boom and bust of the late 1990s and early 2000s, but now stands to fall below that level thanks to the Essar deal.

''The review for possible downgrade reflects our concern that the potential benefits of the Hutch Essar acquisition could be outweighed by the heightened financial risk implied by an increased debt burden and the high level of capital investment likely to be needed in the next two to three years,'' said Niel Bisset, a senior vice president at Moody's.

The agency did not give any guidance on how many notches the rating could fall.

The cost of insuring Vodafone's debt against default edged higher after Moody's announcement, a trader in London said, with five-year credit default swaps moving 1 basis point higher to 25.5 basis points.

The price means it costs 25,500 euros a year to insure 10 million euros of the company's debt against default.

Both S&P and Fitch affirmed their ratings on Vodafone on Monday at A- with stable outlooks.

Fitch argued that the company's strong free cash flow generation and historically low leverage gave it the flexibility to undertake the deal.

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