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What a rating downgrade means for Telstra Corporation Ltd (ASX:TLS)

Telstra Corporation Ltd (ASX: TLS) has been downgraded by credit rating agency S&P Global Inc (S&P), due to “intense competition” and “weak profitability”. The long-term rating has gone from A to A-, while the short-term rating is now A-2 from A-1. Despite the downgrade, S&P says the outlook remains stable for Telstra due to the size of the company’s market share.

Telstra has gone from having a monopoly of the market to seeing vigorous mobile competition from Vodaphone and Optus. The competition looks to step up with TPG Telecom Ltd (ASX: TPM) entering the mobile market to become the fourth player.

The downgrade in the S&P rating may mean higher interest rates for Telstra when the company rolls over its debt. But, the rating is still investment grade so should propose a significant problem yet.

The share price is down 1% after a bounce on Friday following a buy recommendation by UBS.

Vocus Group Ltd’s (ASX: VOC) share price is down nearly 4% today.

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Motley Fool contributor Rosemary Steinfort owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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