(The following statement was released by the rating agency)
Nov 12 - Fitch Ratings says that Telecom Italia’s (TI,‘BBB’/Negative) Q312 results showed management’s commitment to reducing debt, but the challenge operating environment means that the end-2013 net debt target of EUR25bn may still be difficult to achieve.
While TI’s free cash flow generation in 2012 has been running slightly ahead of Fitch’s expectations, continued negative operating trends are a concern. Q312 results show that domestic service revenue growth in both the consumer and corporate segments have come under renewed pressure from continued competition, regulatory pressures and the weak economic environment. In particular, the recent mobile termination rate (MTR) reduction seems to have fuelled another round of price competition. While TI’s absolute EBITDA is broadly unaffected by MTR cuts, the company’s main competitors seem to have passed on to customers some of the reduction in their marginal cost of voice traffic in the form of lower tariffs. Another MTR reduction due on 1 January 2013 may maintain this level of competition in the Italian mobile market in 2013.
Fitch continues to expect that TI’s leverage - as measured by unadjusted net debt to EBITDA, excluding Telecom Argentina - will reach 2.7x at the end of 2012. However, Fitch’s scenario analysis shows that under certain conditions, TI’s leverage could increase again in 2013, moving towards the key 3.0x threshold. The Negative Outlook on TI’s rating reflects the weak macroeconomic backdrop which could reduce demand for telecom services and negatively impact TI’s domestic revenue and profitability. In addition, any extended period of sovereign weakness could impair the company’s access to capital markets to refinance debt maturities.
TI has reiterated its 2012 net debt target of EUR27.5bn, with confidence in achieving solid operating free cash flow generation in Q412. However, management indicated that achieving this target would also require contributions from disposals, mainly the planned sale of TI’s 78% stake in Telecom Italia Media which should be finalised before the end of this year. Management has also reiterated its end-2013 net debt target of EUR25bn.
TI’s Brazilian operations currently provide around 10% of the group’s EBITDA less capex (excluding Telecom Argentina). Medium-term growth prospects could see this contribution increase if regulatory and competitive challenges are overcome. But Brazil’s contribution remains small in absolute terms and TI’s credit profile over the longer-term, in Fitch’s opinion, will very much remain dependent on its domestic performance. Fitch has previously indicated that leverage as measured by unadjusted net debt to EBITDA (excluding Telecom Argentina) sustainable above 3.0x could result in TI’s rating being downgraded