Just when bond investors thought it was safe to go back into the telecom sector, Moody's dropped a bombshell. By downgrading British Telecom's long term debt two notches to Baa1 last month, it threw a sector showing glimmers of recovery into disarray. Most astonishing to investors and galling to BT's management was the fact that Moody's chose May 10, the day BT announced its rights issue - the lynchpin of its debt reduction plans - to break the bad news, fuelling speculation that it was privy to particularly damming information about the company.
It wasn't that the market hadn't expected the downgrade at all - earlier that day, Standard&Poor's had taken BT down a peg to A- and placed it on negative outlook - but the severity of Moody's action caught it off guard. BT had been making all the right noises: besides committing to the largest ever rights issue, expected to raise £5.9 billion, it had made progress with the demerger of BT Wireless, found a buyer for Yell, its directories business, appointed a new CEO and suspended dividend payments for the year.
A number of developments had fostered the belief that the whole sector was getting back on track and the bulk of the bad news was over.