March 14 (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
- 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
- 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.
Negative: Future developments that could lead to negative rating actions
- 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
- 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
- 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'