MILAN Feb 11 Moody's has cut its rating on Italy's Telecom Italia by one notch to Baa3, citing weaker cash flow and a failure to meet a year-end debt target as its core domestic market falters.
In a note on Monday, Moody's said increased financial risk might not be fully offset by a proposed cut in dividend and plans to issue up to 3 billion euros ($4.01 billion) of hybrid bonds.
"The downgrade of Telecom Italia's ratings reflects the increased risks to its business from the challenging operating environment in its key domestic market," Moody's analyst Carlos Winzer said.
Last Friday, Telecom Italia launched a plan to raise up to 3 billion euros in costly hybrid debt and halved its dividend to help fund infrastructure spending.
It said net debt in 2012 had been cut to 28.3 billion euros, short of its year-end target of 27.5 billion euros, as delays to planned disposals, a recession in Italy and slower Latin America growth took their toll.
The company also changed its net debt target for the current year to below 27 billion euros from 25 billion euros.
"This combined with the company's public guidance to single-digit decline in reported EBITDA for 2013, represents a substantial deviation to Moody's previously expected gradual improvement trend," the rating agency said.
"Moody's remains concerned that Telecom Italia is facing stronger headwinds in its efforts to improve its financial ratios," it said.
Like other phone companies in Europe, Telecom Italia is struggling to fund improvements in its fixed and mobile networks while having to cut its mountain of debt.
The rating has a negative outlook, Moody's said. ($1 = 0.7474 euros) (Reporting By Stephen Jewkes; Editing by Michael Roddy)