Oct 1 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Deutsche Telekom's
(DT) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook.
Fitch has also affirmed DT's senior unsecured rating at 'BBB+' and Short-term
IDR at 'F2' This includes the debt issued by Deutsche Telekom International
Finance B.V. and guaranteed by DT.
DT is an established incumbent operator in Germany. It faces only modest
competitive pressures domestically on the back of sustainably strong market
positions and a benign economic environment leading to stable cash flow
generation. These strengths are diluted by notably more weakness in its European
franchise suffering from austerity across the region, and multiple challenges in
the US market. High leverage relative to the current 'BBB+' rating provides
little financial flexibility within the rating.
KEY RATING DRIVERS
Strong Incumbent Position
As an incumbent operator, DT benefits from strong domestic positions. The
company holds reasonably large retail market shares in key segments which have
been largely sustained. DT is also a key infrastructure provider which entitles
it to substantial wholesale revenues. The incumbent's accelerated capex into
fibre upgrades/vectoring and LTE improves its competitive positions with
positive implications for the top line.
Pressures Across Europe
Nearly all of DT's European countries of operations experience an impact of
austerity and economic jitters to a varying degree which translates into weak
financial performance. DT has been able to generally withstand competitive
pressures performing on a par with or better than its peers. However, this was
not enough to reverse negative financial performance trends. At least moderate
pressures are likely to continue over the medium-term.
US Operating Turnaround, Challenges
After a merger with MetroPCS, DT's T-Mobile USA emerged as a stronger and larger
market player with a spectrum portfolio sufficient to catch up with larger
players in terms of LTE coverage. However, challenges are multiple. The merits
of the company's 'un-carrier' business model that implies low average revenue
per user but also low subscriber acquisition/retention cost per customer remains
largely untested in this market. The company's operating turnaround in Q213 had
a pronounced negative impact on the company's EBITDA generation. A migration of
MetroPCS's CDMA customers to the UMTS/LTE network entails a risk of churn
increases or uncontrolled handset subsidies and subscriber retention costs.
High Leverage, Depressed FCF
DT's leverage is high for its rating level, and is projected to be close to
Fitch's downgrade trigger of 3.5x in funds from operations (FFO) adjusted net
leverage at end-2013. Fitch expects that the company would deleverage from that
level in 2014 - a failure to do so would likely indicate the management's higher
debt tolerance than currently expected by the agency. Fitch believes the company
retains a deleveraging capacity based on its positive free cash flow generation.
However, cash flows will be depressed by high network investments over the next
three to four years. The company is facing high capex in the US in 2013, but
also in Germany in 2014-2016, and is exposed to spectrum auctions across Europe
in 2013-2014. Dividend cuts can only partially offset high investments and
A negative rating action could be driven by a rise in leverage to above 3.5x FFO
adjusted net leverage without a clear path to deleveraging. Pressure on free
cash flow driven by EBITDA margin erosion, higher capex and shareholder
distributions, or significant underperformance in the core domestic market and
at other key subsidiaries may also be negative for ratings.
A commitment to a lower leverage target and stabilisation of operating
performance across the entire franchise may be rating-positive.