Fitch Downgrades Telecom Italia Debt Ratings

Fitch Ratings has downgraded Telecom Italia's (TI) Long-term Issuer Default Rating (IDR) and senior unsecured ratings to 'BBB' from 'BBB+', which is generally considered to be lower medium grade, following TI's announcement last week relating to its industrial targets for 2009-2011. The Outlook remains Stable.

The downgrade reflects public targets that no longer envisage the company deleveraging to 2.5x by 2010, a target which Fitch has stated a number of times this year was a prerequisite for the preservation of the 'BBB+' rating. While the agency remains confident of management's commitment to sustaining and improving the credit profile of TI, the extended timeline within which a 2.5x (net debt / EBITDA) metric is envisaged better reflects a 'BBB' rating.

The 2009-11 Industrial Plan continues to emphasise cost containment along with clear initiatives to stabilise and improve domestic revenues. However, forecast targets through 2010 are more muted than was expected when management published targets for that year in March. The agency recognises that planning is an evolving process and that heightened uncertainties over global economic and financial conditions are causing telecom businesses generally to be more cautious. A commitment to a leverage metric, now targeted in the region of 2.65x by 2010, is nonetheless outside the scope the agency feels supports a rating at the high end of the 'BBB' range.

At 2.3x, the target for 2011 is more conservative than previous statements, with management's commitment to improving the financial profile of TI, in the agency's view, the best way of improving value in the business. This target does, however, require the delivery of some ambitious assumptions (particularly in the back-end of the plan). Fitch notes that other European telecom markets, such as the Spain and France for instance, demonstrate that incumbent businesses can be stabilised and growth achieved, which is a key objective in TI's plan. Revisions to public statements suggest that growth in the top line at TI, while ultimately targeted at a higher level, will now take somewhat longer than previously thought to achieve.

Potential non-core asset sales (with a target of €2bn - €3bn suggested as possible, but not embedded in reported targets) could improve TI's leverage profile over the course of the plan. This potential is subject to some uncertainty however, with the disposal of non-core assets unlikely in Fitch's view to be quickly achieved given current telecom valuations and management's (understandable) desire not to sell assets at discounted values.

Fitch therefore believes that TI's current financial profile, and that targeted over the next two years, sits more appropriately at the 'BBB' level, notwithstanding what the agency continues to view as a good business and operational profile. Fitch believes that a more positive view will require considerable progress towards the achievement of a 2.5x leverage metric driven by solid operational performance and free cash flow generation, the latter of which will in particular be weakened in 2009 by anomalies between accrual and cash tax charges.

Fitch notes that TI's liquidity remains strong with the company reporting €5.8bn of cash and marketable securities at 3Q08, along with €6.5bn of unutilised bank lines (maturing 2014), providing room for the company to remain out of credit markets for some time (potentially through 2010) should debt market conditions remain dislocated.

Posted to the site on 11th December 2008