Fitch Affirms Portugal Telecom Debt Ratings with Negative Outlook
Fitch Ratings has affirmed Portugal Telecom's (PT) Long-term Issuer Default rating (IDR) at 'BBB' with Negative Outlook. The affirmation follows review of trading information for the nine months ended 30 September 2007 (9M07).
The rating affirmation takes into account PT's continued strong competitive positioning, high and relatively stable EBITDA margins and currently moderate leverage when compared to PT's western European peer group. Nevertheless, these positives are offset by strengthening of competition in domestic and international markets, resulting in a gradual decline of market share and increased pricing pressure in domestic mobile, domestic fixed line and Brazilian mobile (Vivo) sectors.
Fitch also notes that, while Vivo contributes significantly to reported EBITDA numbers, it represents an emerging market concentration. In addition, it is likely that, PT's ability to look to Vivo for real repatriated cash flow will be limited in the short-term. The affirmation also factors in the expectation that PT will continue with the planned return of cash to shareholders (EUR4.2bn in 2006-09), which is likely to result in increased leverage going forward.
The Negative Outlook continues to reflect Fitch's opinion that PT's credit profile is likely to continue to be under pressure as further competition arises in both its domestic and international areas of operation (as evident in 9M07 market share declines). The spin-off of PT Multimedia (completed 7 November 2007) will deprive PT of one of the few remaining growth assets and result in both entities becoming direct competitors in voice, broadband and TV.
While PT's domestic mobile business showed trading improvements 9M07, regulatory intervention via reductions in mobile termination rates look likely to continue into 2008. Recent comments made by regulators that the spinning-off of PT Multimedia is unlikely to result in regulatory relief adds to Fitch's concern in this area.
A reliance on PT's Brazilian operation (Vivo) has intensified following the August 2007 announcement that Vivo would be spending around BRL1.2bn on acquisitions. In addition, higher future interest costs (deriving from the November 2007 announcement that Vivo's board have approved the raising of an additional BRL3bn of bonds) and significant capital expenditure requirements in the Brazilian operation over the next two years are likely to represent increased commitments on Vivo's cash flow going forward.
Finally, the Negative Outlook reflects uncertainty about PT's financial policy in terms of further distributions to shareholders and compounded by recent comments from PT's Chairman (6 December 2007), related to both the possibility of future domestic consolidation and PT's need to gain scale in international markets, which indicate that further debt funded acquisitions cannot be ruled out at this time. However, public guidance from PT management that the financial policy has stabilised and is unlikely to become more shareholder friendly and further clarity on the regulatory response to the PT Multimedia spin-off could result in a stabilisation of the rating.
Posted to the site on 19th December 2007