Fitch Affirms Telecom Italia at 'BBB'; Outlook Negative
March 14 |
March 14 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has affirmed Telecom Italia SpA's (TI) Long-term Issuer Default Rating (IDR) at 'BBB'. The Outlook on the Long-term IDR is Negative. A full list of rating actions is below. The affirmation confirms that Fitch's recent downgrade of Italy's sovereign rating to 'BBB+'/Negative has no immediate impact on TI's ratings. The Negative Outlook for TI underlines Fitch's concerns that TI continues to be dependent on a weak Italian economy, and after the recently announced dividend cut, has limited debt reduction options in future to address further deterioration in the business. KEY DRIVERS - Investment Grade Operating Profile TI's operating profile as an incumbent in Italy offsets some of its weak financial metrics. If the domestic business can be stabilised, and leverage remains under control, Fitch fundamentally views TI as an investment grade credit. A lack of cable competition in Italy means that TI is not facing an immediate threat from a triple-play competitor with a superior network advantage. It does not have the same pressure to rollout a fibre network as some other European incumbents. - Sovereign-related Risk For a primarily domestic issuer like TI, Fitch guidelines indicate that investment grade issuer ratings can be as much as two notches above the related sovereign rating. Assuming TI's liquidity, leverage and domestic performance remained satisfactory, TI would only be downgraded for sovereign linkage reasons if Italy's rating was downgraded to 'BB' or lower (which is not currently anticipated). Key factors in maintaining the two notch differential between TI's rating and the sovereign will be solid liquidity to minimise refinancing concerns, and limited impact from any potential government austerity measures. - Leverage Remains High TI ended 2012 with leverage - measured by unadjusted net debt to EBITDA, excluding Telecom Argentina - at around 2.7x, broadly unchanged since 2010. With continued declines in EBITDA, Fitch expects leverage will increase in 2013. Fitch's scenario analysis shows that under certain conditions, driven by a worsening macro-economic environment, and sluggish Brazilian growth, TI's leverage could breach the key 3.0x threshold, which would result in negative rating action. - Protecting Cash Flow Generation The challenge facing TI is to maintain its domestic market position in an increasingly price competitive market while protecting free cash flow generation and reducing leverage. Improving efficiency in operations and capital expenditure should go some way to preserving profitability. Continued investment in long-term evolution mobile network upgrades and fibre deployment should allow TI to increasingly differentiate its service offering based on network quality. - Limited Contribution from Brazil Brazil currently provides just under 10% of the group's EBITDA less capex (excluding Telecom Argentina). Revenue growth expectations for 2013 and 2014 have been scaled back due to a slowing economy and higher than expected mobile termination rate cuts. Growth in 2015 and beyond could increase as economic growth picks up and regulatory and competitive challenges are overcome. TI also has to contest a legal case brought by the Brazilian tax authorities, claiming EUR550m in unpaid taxes. The judicial process is likely to be lengthy. TI believes it is in a solid position and does not expect to incur any charges and therefore has not made any provision to cover this potential liability. RATING SENSITIVITIES Negative: Future developments that could lead to negative rating actions include: - Leverage as measured by unadjusted net debt to EBITDA (excluding Telecom Argentina) sustainably above 3.0x could result in TI's Long-term IDR being downgraded. - Revenue and EBITDA trends in the domestic business in 2013 which are worse than that reported in 2012. - An Italy sovereign downgrade to 'BB' or lower. Positive: Future developments that could lead to positive rating actions include: - A revision of the Outlook on Italy's sovereign rating ('BBB+'/Negative) to Stable might result in a similar revision of the Outlook on Telecom Italia's IDR, as this would point to a lowering of macroeconomic and refinancing risk. - A sustained improvement in the company's domestic business's operating and financial profile would be required before the Outlook on Telecom Italia's IDR could be revised to Stable. LIQUIDITY AND DEBT STRUCTURE TI's liquidity remains healthy. TI had EUR8.18bn of cash and cash equivalents on its balance sheet at the end of 2012 as well as EUR7.95bn of undrawn committed facilities (which includes EUR4bn available till May 2017). Together, this liquidity should allow TI to cover debt maturities well into 2014. FULL LIST OF RATING ACTIONS Telecom Italia SpA Long-term IDR: affirmed at 'BBB', Outlook Negative Senior unsecured rating: affirmed at 'BBB' Telecom Italia Capital and Telecom Italia Finance SA Senior unsecured rating: affirmed at 'BBB'
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