S&P urges Telefonica to keep cutting debt as affirms rating

MADRID Thu Dec 20, 2012 10:53am EST

MADRID Dec 20 (Reuters) - Standard and Poor's affirmed Telefonica's credit rating at two notches above junk on the assumption the struggling Spanish telecoms group will make more "aggressive" moves to cut debt.

S&P said on Thursday it affirmed a long-term BBB rating and A-2 short term-rating with negative outlook for Telefonica, which expects to end 2012 with 50 billion euros ($66 billion) of debt compared with 56 billion at the end of September.

Maintaining its debt rating is a top priority for Telefonica, which is racing to cut and refinance debt to compensate for the sharp economic downturn in Spain, where it is losing mobile customers in droves and shed 6 percent of its pay-TV customers in the year to September.

The company scrapped its dividend in July for the first time since the Spanish civil war in the 1930s in a move welcomed by ratings agencies.

"We think the group's liquidity is likely to remain adequate in the foreseeable future, assuming it continues to aggressively complete debt refinancing measures, possibly complemented by additional assets sales," S&P said in a statement.

Telefonica must raise between 7 billion and 9 billion euros a year through 2015 to cover debt maturities. It issued seven bonds in 2012.

"The negative outlook mainly reflects the risk of a downgrade in 2013-2014 if the group failed to maintain sufficient liquidity comfort ahead of continuously massive annual debt maturities," S&P said in a statement.

The company has bonds worth 6.5 billion euros maturing in 2013 and 7.4 billion euros in 2014.

Telefonica has sold a number of assets this year, including its stake in China Unicom and its call centre business Atento to raise cash and hold on to its prized investment grade rating. A downgrade would push up the firm's financing costs.

Telefonica also successfully listed part of its German unit and is now expected to float its Latin American businesses.

The ratings agency also warned that Telefonica's ties to its home market posed a danger, both in terms of a sovereign downgrade for Spain and its flagging domestic business.

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