CDS: Telecom Italia takes beating after CEO resignation
LONDON, Oct 4 (IFR) - The cost of insuring Telecom Italia's debt against default climbed on Friday, while its outstanding bond curve edged wider, a day after chief executive Franco Bernabe resigned, triggering questions over the group's cost-saving strategy.
The company, which in August issued a profit warning spurred by a price war for mobile phone services, saw its five-year CDS trade almost 5% wider, to around 350bp on the bid by mid-morning, while its senior bond curve broadened by as much as 10bp over swaps.
Some strategists said that the disappointment was not so much related to the departure of the group's head at Thursday's board meeting as to the lack of transparency the company offered on its strategy going forward under new leadership.
"There was no mention of the much anticipated steps to reduce leverage," Mizuho credit strategist Michael Ridley wrote in a note. "We are therefore incrementally convinced that Moody's review will crystallise into a downgrade of Telecom Italia's ratings into sub-investment grade."
Before his departure, 65-year old Bernabe had been seeking support for a share issue to raise as much as EUR5bn to avoid a credit rating downgrade to junk status, according to Reuters.
Under new leadership, strategists predict that asset disposals will be more likely, though implementation could take longer than initially expected. [ID:nL6N0HT266}
"There is a greater risk of a downgrade to high-yield, as a sale of assets will take time," ING credit strategists Aengus McMahon said.
Telecom Italia's CDS and bond curve had already come under pressure earlier this week on initial suspicions Bernabe may be throwing in the towel, imperilling capital increase plans.
On the cusp of junk at Baa3/BBB-/BBB-, the group has been in the ratings agency firing line for some time due to its troubled earnings trajectory, adverse regulatory effects and exposure to a still ailing sovereign economy.
In August, both Moody's and S&P placed their ratings on review for downgrade, increasing the chances of a cut to high-yield within the next 12 months, following a profit warning.
Shares in the company, which is one of Italy's largest private sector employers, have fallen more than 24% since this time last year, according to Thomson Reuters data, and were trading around 1% down on the day, at EUR0.64, by mid-morning on Friday.
Marco Patuano, who started his career in Telecom Italia after graduating at Milan's elite Bocconi university in 1990, has been named as Bernabe's successor and now faces the task of cutting nearly EUR29bn of debt at the company, Reuters reported. (Reporting By Josie Cox; Editing by Philip Wright and Helene Durand)
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