Rating Action: Moody's places Telecom Italia's ratings on review for downgrade
Global Credit Research - 08 Aug 2013
Madrid, August 08, 2013 -- Moody's Investors Service has today placed on review for downgrade the ratings of all debts for (or guaranteed by) Telecom Italia S.p.A., and all supported debts within its family of issuers, including the Baa3/(P)Baa3 senior unsecured and the Ba2 subordinated ratings. The rating action follows the company's announcement of its Q2 2013 results, updated management outlook and revised financial guidance.
A full list of affected ratings is provided towards the end of this press release.
"Our decision to place Telecom Italia's ratings on review for downgrade is driven primarily by the deterioration in its domestic revenues and EBITDA resulting from the worsening economy, higher unemployment, adverse regulatory effects and more intense competition in Italy," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telecom Italia. "The company's inability to meet its domestic and group EBITDA targets has also raised concerns."
RATINGS RATIONALE
Today's rating review reflects the deterioration in Telecom Italia's domestic revenues and EBITDA, as shown in its Q2 2013 results, as well as a failure to achieve some of its committed operating performance targets. This negative development is despite the group having partially mitigated the effects of a very tough market. As a result, Telecom Italia is likely to struggle to achieve its reported net financial position target of under EUR27 billion by year end.
During the rating review, Moody's will assess the negative effect on the company of the continuing tougher-than-expected domestic mobile business in 2013, which has been aggravated by intensified competitive pressure and adverse regulation. An important consideration will be the extent to which management can compensate for the increased risk by implementing measures to strengthen the balance sheet and reduce financial risk. Moody's will also assess if these measures would be sufficient and timely enough to fully offset the company's increased business risk.
Moody's notes that Telecom Italia will continue to face substantial challenges in 2013, including the ongoing recession in Italy, adverse regulation and rising levels of competition, all of which have served to erode the company's domestic revenues and EBITDA. In addition, Moody's will assess the extent to which Telecom Italia will be able to meet its commitments to reduce group debt and maintain ratios within current rating limits, given that operating cash flow will likely continue to deteriorate at a faster-than-expected pace. Although the group's international diversification partially mitigates the domestic pressure on its revenues, limited cash up-streaming and the expected lower growth rates at its Brazilian subsidiary Telecom Italia Mobile (TIM) Brazil could challenge Telecom Italia's ability to meet group financial guidance.
Telecom Italia's management confirmed that the group's revenue trend for 2013 would remain stable. However, it readjusted its EBITDA guidance to a mid-single-digit decline for 2013 at group level and a high-single-digit decline for domestic operations. The company's management is facing difficulties in forecasting highly volatile domestic mobile revenues in a very challenging market, as reflected by its readjustment of its EBITDA guidance less than three months after its previous guidance commitments.
Telecom Italia's earlier cut in dividends, to EUR450 million per annum through 2015, will most likely not be sufficient to offset the negative effect on its cash flow of a weaker-than-expected performance and the operating challenges ahead. This strategy also leaves the company with fewer internal options to protect its financial profile in the event of a further sustained deterioration in its operating performance.
Moody's remains concerned that Telecom Italia is facing stronger headwinds than previously expected in its efforts to improve its financial ratios. Given the challenging operating conditions in Italy, and limited options to strengthen the company's balance sheet, management may find it difficult to meet its updated deleveraging commitment of a reported net financial position/EBITDA of below 2.0x in the next 24 months.
Moody's considers that, for the time being, Telecom Italia's Baa3 rating is supported by the company's (1) scale; (2) integrated telecoms business model, with strong market positions in both the fixed and mobile segments; (3) geographical diversification, mainly as a result of its presence in Brazil and Argentina; (4) continued commitment to debt reduction and financial discipline; and (5) high operating margins, ongoing operational expenditure (opex) reductions and strong liquidity.
The Baa3 rating also factors in (1) the deterioration in Telecom Italia's operating performance, including an expected further EBITDA decline this year; (2) management's plan to partially offset the weakened performance with a lower debt level; and (3) the company's outlook for the 2013-15 period.
WHAT COULD CHANGE THE RATING DOWN/UP
Prior to initiating the review, Moody's had indicated that downward pressure on the rating could potentially result if (1) Telecom Italia were to deviate from management's announced debt reduction plan, which includes a reported net financial position of less than EUR27 billion by year-end 2013; and (2) the company's overall financial metrics do not gradually improve in line with their plan, which includes positive low-single-digit revenue and a positive EBITDA compound annual growth rate through 2015. More specifically, Moody's had noted that a rating downgrade could result if the company failed to sustainably reduce its net adjusted debt/EBITDA ratio to below 2.8x.
In view of today's action, Moody's does not currently anticipate upward rating pressure. However, prior to the review process being initiated, Moody's had indicated that it could consider a stabilisation of the outlook if the company delivered improved financial metrics on the back of a supportive operating environment, including a net adjusted debt/EBITDA comfortably below 2.8x. Moody's had also noted that upward pressure could result over time if Telecom Italia's net adjusted debt/EBITDA were to improve to below 2.5x.
LIST OF AFFECTED RATINGS
Ratings on review:
..Issuer: Telecom Italia S.p.a.
....Senior unsecured medium-term note programme at (P)Baa3
....Senior unsecured regular bond/debenture at Baa3
Subordinated hybrid instrument rating at Ba2
Ratings on review:
..Issuer: Olivetti Finance N.V.
....Senior unsecured regular bond/debenture at Baa3
Ratings on review:
..Issuer: Telecom Italia Capital S.A.
....Senior unsecured medium-term note programme at (P)Baa3
....Senior unsecured regular bond/debenture at Baa3
....Senior unsecured shelf at (P)Baa3
Ratings on review:
..Issuer: Telecom Italia Finance, S.A.
....Senior unsecured medium-term note programme at (P)Baa3
....Senior unsecured regular bond/debenture at Baa3
Ratings on review:
..Issuer: Telecom Italia S.p.A. (old)
....Senior unsecured bank credit facility at Baa3
Outlook Actions:
..Issuer: Olivetti Finance N.V.
....Outlook, Changed To Rating Under Review From Negative
..Issuer: Telecom Italia Capital S.A.
....Outlook, Changed To Rating Under Review From Negative
..Issuer: Telecom Italia Finance, S.A.
....Outlook, Changed To Rating Under Review From Negative
..Issuer: Telecom Italia S.p.A.
....Outlook, Changed To Rating Under Review From Negative
..Issuer: Telecom Italia S.p.A. (old)
....Outlook, Changed To Rating Under Review From Negative
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was the Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on
www.moodys.com for a copy of these methodologies.
Telecom Italia Group (consisting of Telecom Italia S.p.A. and its subsidiaries) is the leading integrated telecommunications provider in Italy, delivering a full range of services and products, including telephony, data exchange, interactive content and information and communications technology solutions. It is also the operator of one of the three national TV networks. In addition, the group is one of the top telecoms players in Argentina and in the Brazilian mobile market, operating through its subsidiary Telecom Italia Mobile (TIM) Brazil. Telecom Italia's major shareholder is a consortium (Telco S.p.A.) composed of Telefónica S.A. (Baa2 negative), the insurance company Generali, and the banks Mediobanca and Intesa Sanpaolo. This consortium holds a 22.4% stake in Telecom Italia. For 2012, Telecom Italia reported EUR29.5 billion in revenue and EUR11.7 billion in EBITDA.
