RATINGS agency Standard & Poor's (S&P) yesterday warned it may drop Telkom's credit rating from "lowest investment grade" to "highest speculative grade", commonly known as junk bond, within the next year.

S&P said in a review of Telkom's BBB-credit rating yesterday it was giving the telecoms company a negative outlook, meaning it might lower the rating by a notch to BB+ if continued strong pressure on its traditional fixed-line voice revenue, operating losses for mobile operations, and heightened competition were to result in a prolonged erosion of revenue and profitability.

Telkom is battling with increased competition and declining revenue in fixed-line operations. Its mobile unit, 8ta, has had a tough time operating in the highly competitive mobile market.

S&P views Telkom's business risk profile as "fair" and its financial risk profile as "modest".

Its ratings on Telkom reflected, among other things, Telkom's strong leadership position "in the fixed-line telecoms market (and) good growth prospects in the broadband market".

However, the agency said, "we expect Telkom's core fixed-line operations to suffer over the next two years from the sharp downward trend in voice traffic and steady access line losses".

"This trend will likely stem from ongoing fixed-to-mobile substitution, rising pricing pressures due to mounting competition, and reduced dependency of mobile operators on Telkom for transmission capacity," S&P said.

It might also revise Telkom's outlook to stable if "we anticipate stabilisation of the core fixed-line operations, maintenance of earnings before interest, tax, depreciation and amortisation margin of at least 25%, pronounced progress in building a sizeable and profitable mobile business, and if the company demonstrates its capacity to protect credit metrics in line with our rating expectations".