RPT-Fitch affirms Portugal Telecom at 'BBB-'; outlook negative upon Oi merger announcement
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Oct 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Portugal Telecom SGPS SA's (PT) Long-term Issuer Default Rating (IDR) of 'BBB-,' and affirmed the senior unsecured rating of the bonds issued by Portugal Telecom International Finance BV at 'BBB-.' The Outlook on the IDR remains Negative.
KEY RATING DRIVERS
The affirmation of the ratings follows the announcement on 2 October 2013 of the proposed merger of PT, Oi S.A. (BBB-/Negative) and the Oi Holding Companies into a single Brazilian incorporated listed entity.
The merger of the two groups, if completed as presented, removes some of the negative rating pressures Fitch saw affecting PT's credit profile; namely the sovereign linkage and pressure of a legal domicile in Portugal (BB+/Negative), and reliance partly on a stream of associate dividend receipts, the timing and size of which had become increasingly difficult to predict. As such the merger is viewed positively by Fitch. The re-domicile of the enlarged entity to Brazil (BBB/Stable) subject to an appropriate ongoing credit structure, removes the sovereign pressure where Portugal remains under fiscal and austerity driven stress and where Fitch has previously guided a maximum permissible linkage of two notches above the sovereign rating of 'BB+'/Negative.
The combined entity will be a materially larger business, with strong cultural links and greater diversification, able to benefit from management's identified synergies. Collapsing a complicated and leveraged intermediate holding company structure combined with a proposed capital raising of up to BRL8.0bn, should moderately improve leverage, enhance financial flexibility and free management to concentrate on the turnaround of the Brazilian operations. With leverage at both companies under pressure, management have stated a desire and rationale for the merger, to improve the enlarged group's cash flow and leverage profile. The enlarged group will benefit from PT's expertise in delivering effective triple and quad-play services; with Fitch considering that PT has delivered solid operational performance domestically despite a particularly difficult economy.
Deleveraging remains key to the ultimate stabilisation of PT's ratings. Notwithstanding a successful closing of the merger, these pressures are expected to remain in the near to intermediate term; features which underpin the Negative Outlook.
Critical to the ultimate rating levels of surviving PT debt, once the merger is finalised, is Fitch's view that the liabilities management exercise referred to by management, will result in the pari passu ranking of remaining PT bondholders in the combined group. If it becomes apparent the merger is likely to complete without the pari passu interests of PT bondholders being assured it is possible that a negative rating action may occur.
Completion of the merger is subject to a number of conditions, including shareholder and regulatory approvals, and a successful liabilities management exercise. Fitch's existing guidelines will apply until such time as the merger as proposed is effective. Guidelines for the combined group will be developed as the prospect of the transaction closing nears.
The current guidelines are as follows:
Positive: Future developments that could lead to positive rating actions include:
Fitch adjusted leverage (net debt to EBITDA (both excluding Brazil)) plus associate dividends trending consistently around 2.8 or below.
Negative: Future developments that could lead to negative rating action include:
Fitch adjusted leverage (net debt to EBITDA (both excluding Brazil)) plus associate dividends consistently at or above 3.5x
Fitch has guided PT should be rated no more than two notches above the sovereign. A downgrade of the sovereign to 'BB-' would lead to an immediate downgrade of PT.