S&P downgrades Telecom Italia on weakening earnings

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Il logo Telecom Italia (TIM) a Milano. REUTERS/Stefano Rellandini/File Photo

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MILAN, Nov 19 (Reuters) - S&P said on Friday it had cut Telecom Italia's (TLIT.MI) debt because shrinking revenue and profits were driving higher a key measure of the Italian phone group's debt burden as calculated by the credit rating agency.

Weighed down by an adjusted gross debt of 29 billion euros ($33 billion), TIM is wrestling with ferocious competition on its home market at a time when it faces heavy investments to support Italy's broadband connectivity push.

The group's worsening financial performance has prompted top investor Vivendi (VIV.PA) to challenge CEO Luigi Gubitosi. read more

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S&P said in a note it had previously expected an improvement in TIM's debt profile in 2020.

"We now expect lower revenue and earnings will cause our adjusted leverage metric to rise to 4.3 times in 2021, and remain above our 4.0 time threshold for the 'BB+' rating until 2023," it said in a statement.

As a consequence, S&P cut its long-term rating on TIM's debt to 'BB' from 'BB+' with a stable outlook.

Also Moody's Investors Service has a negative outlook on its Ba2 rating on TIM's debt.

All the three main agencies rate it below the investment grade level.

"The decline is due to weaker year-on-year domestic service revenue, a slower recovery of roaming and handset sales, and adverse currency movements that are still affecting contributions from the Brazil business in 2021," S&P said.

In an effort to counter the revenue decline, Gubitosi has been looking at options to squeeze cash out of TIM's assets including its prized fixed-line grid.

S&P said it had not taken into account in its analysis a project currently on hold to combine TIM's network with that of fibre-optic rival Open Fiber, because the terms of any such deal would be key for its impact on TIM's ratings.

"Although a combination of OpenFiber and Telecom Italia's fixed-line assets would mitigate long-term competition risk for the wholesale business, we believe loss of control over the joint assets would likely erode TIM's business profile."($1 = 0.8853 euros)

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Reporting by Valentina Za, editing by Maria Pia Quaglia and David Gregorio

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