TEXT-Fitch place ZTE's 'BB-' ratings on negative watch
ZTE responded to the US congressional committee report by emphasising its independence from state influence, the integrity of its vendor-neutral network security systems, and how the value of various telecom equipment components ZTE purchases from US companies is significant compared with the revenue it derives from the US. The company also expressed disappointment that the two Chinese equipment makers had been singled out, and how the report failed to consider Western telecom equipment vendors and their Chinese joint-venture manufacturing partners in its assessment, given that the vast majority of telecom equipment in place in the US is in fact manufactured in China.
Margins for the Chinese telecom equipment manufacturers are under pressure, partly because they typically need to offer significant discounts to win strategic orders from large network operators in developed markets. The extent of the discount required is only likely to be greater for those markets where supposed security concerns weigh against the Chinese exporters. This is despite Fitch's view that the Chinese technology is highly competitive and offers significant cost savings.
What Could Trigger a Rating Action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- sustained operating EBITDA below USD600m
- sustained operating EBIT margin of less than 2%
- sustained FFO-adjusted leverage above 6x.
Positive: The current Rating Watch is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade.
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