Telecom Italia CDS under pressure again as Vodafone sues

Mon Aug 5, 2013 5:50am EDT

* Telecom Italia CDS hits fresh year high

* Analysts warn on downgrade to junk

By Natalie Harrison

LONDON, Aug 5 (IFR) - The cost of insuring Telecom Italia's debt against default rose on Monday, while spreads on its cash bonds widened on news that British telecoms firm Vodafone is suing the company for EUR1bn, accusing it of abusing its dominant position in Italy.

The Italian company's five-year CDS, already under pressure following weak earnings last week, was 30bp wider at 400bp by 0915GMT - taking out the triple top of 383bp hit on July 17, June 24 and March 29 - its widest level since September 2012, and prompting more warnings that its ratings could slip into junk territory.

"While disputes between telecoms operators are relatively frequent, the timing of this announcement is unhelpful for Telecom Italia," Mizuho credit strategists wrote in a note.

On Friday, the debt-laden company downgraded guidance for full-year 2013, citing the difficult economic situation, tough competition in the domestic mobile market, and adverse regulation.

A Vodafone spokeswoman said in an email to Reuters on Sunday that the civil action in Milan stated that Telecom Italia committed a series of abuses from 2008 to 2013, "with the intention and effect of impeding growth in competition in the Italian fixed-line market".

Telecom Italia rejected the claim saying it was confident it would demonstrate the "total correctness" of its behaviour.

"Any headline that increases the potential of further cash outflows at Telecom Italia is likely to put additional pressure on its Baa3 negative rating at Moody's and increase the risk of sub-investment grade ratings," said Mizuho.

BNP Paribas credit analysts warned last week that a downgrade to Ba1 by Moody's appears inevitable unless Telecom Italia takes substantial action via capital increases, or the sale of TIM Brazil.

TITIM's liquid euro cash curve was also bid about 20-30bp wider on Tradeweb. Its 7.75% EUR750m hybrid was 4.8bp wider, bid at a cash price of 96.8 according to Tradeweb, versus its 99.5 launch price in March.

"The story now is TI - under some big pressure following a poor set of results at the end of last week; increased fears of a rating downgrade; potential for a move into HY indices; reduced equity credit of hybrid if junked by Moody's due to yet another hybrid methodology change; and, being sued for a billion by Vodafone," said Suki Mann, a credit strategist at Societe Generale.

"When it rains, it really pours - and here is a company, to save investment grade status, that needs that get out of jail for free card sharpish."