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RPT-Fitch Downgrades Telecom Italia to 'BBB-'; Outlook Negative
August 5, 2013 / 10:40 AM / 4 years ago

RPT-Fitch Downgrades Telecom Italia to 'BBB-'; Outlook Negative

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Aug 5 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has downgraded Telecom Italia SpA’s (TI) Long-term Issuer Default Rating (IDR) to ‘BBB-’ from ‘BBB’. The Outlook on the Long-term IDR is Negative. A full list of rating actions is at the end of this comment.

The downgrade reflects the worsening operating conditions in TI’s domestic business due to regulatory pressure, a continued mobile price war and a weak economic environment. The erosion of TI’s cash flow generation looks to continue into 2014. If the domestic business can be stabilised, and leverage brought under control, Fitch fundamentally views TI as an investment grade credit.

KEY DRIVERS

- Domestic business deteriorating TI’s H113 results and full year domestic guidance were weaker than Fitch expected. TI’s revenue and EBITDA trends in 2013 are likely to be worse than that reported in 2012. The mobile price war in Italy is showing no signs of abating and the effects of a weak Italian economy could to persist into 2014.

- Erosion of financial flexibility

Increasing pressures in the domestic business, TI’s main generator of cash flow, means visibility is worsening. Management has shown in the past it has been able to deal with regulatory and competitive pressures to prevent TI’s credit metrics deteriorating. The Negative Outlook reflects Fitch’s concerns that TI’s financial cushion to deal with future adverse shocks to the business has been reduced.

- High leverage to persist

TI ended H113 with leverage of 2.9x - as measured by unadjusted net debt to EBITDA, excluding Telecom Argentina - which is an increase from 2.7x at the end of 2012. With continued declines in EBITDA, Fitch expects leverage will increase in 2013, and probably in 2014.

- 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. With regulatory and competitive developments, improving efficiency in operations and capital expenditure may not be enough to preserve profitability. However, 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, albeit at a cost.

- Limited Contribution from Brazil

Brazil currently provides just under 10% of the group’s EBITDA less capex (excluding Telecom Argentina ). Revenue growth in 2013 and 2014 is likely to be hampered by a slowing economy and higher than expected mobile termination rate cuts. A weakened Brazilian real further reduces TIM Brasil’s contribution to group EBITDA.

RATING SENSITIVITIES

Negative:

- Leverage as measured by unadjusted net debt to EBITDA (excluding Telecom Argentina) sustainably above 3.5x could result in TI’s Long-term IDR being downgraded.

- Continued weakness in the domestic business with expectations of further high-single digit EBITDA declines in 2014 would lead to a downgrade.

Positive:

- A sustained improvement in the company’s domestic business’s operating and improvement in the company’s financial flexibility 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 EUR6.1bn of cash and cash equivalents on its balance sheet at the end of June 2013 as well as EUR6.7bn of undrawn committed facilities (which includes EUR4bn available until May 2017 and EUR3bn available until March 2018). Together, this liquidity should allow TI to cover debt maturing until 2015.

The rating actions are as follows:

Telecom Italia SpA

Long-term IDR: downgraded to ‘BBB-’ from ‘BBB’, Outlook Negative

Senior unsecured rating: downgraded to ‘BBB-’ from ‘BBB’

Subordinated hybrid rating: downgraded to ‘BB’ from ‘BB+’

Telecom Italia Capital and Telecom Italia Finance SA

Senior unsecured rating: downgraded to ‘BBB-’ from ‘BBB’

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