Fitch Upgrades TeliaSonera's Outlook to Stable

Fitch Ratings today revised Sweden-based TeliaSonera's Outlook to Stable from Negative. At the same time the agency has affirmed the Long-term Issuer Default rating (IDR) and senior unsecured rating at 'A-' (A minus).

The Stable Outlook follows TeliaSonera's publicly announced statements that its Board is unlikely to approve another extraordinary dividend payment for the rest of 2008 and in 2009 in light of the current market turmoil and in a bid to preserve flexibility for any acquisition opportunities. Management is now focused on integrating recent acquisitions in Nepal and Cambodia while any new acquisitions will be targeted towards mid-sized assets in growth markets.

The Swedish government has in the past expressed its willingness to reduce its stake in TeliaSonera, although Fitch believes the current low equity value decreases the likelihood of such a move in the medium term.

"While the company's aggressive shareholder distribution policy and a potential exit of the Swedish government were putting increased pressure on the ratings, these are less of a concern in the current environment," says Apostolos Bantis, Associate Director at Fitch's TMT Group in London. "However, we note that continued margin erosion and gradually rising leverage metrics are keeping the rating at the lower end of an A minus rating level. Any deviation from the publicly announced guidelines, including sizable debt-funded acquisitions or a revisit of extraordinary dividends would cause downward pressure on the ratings."

TeliaSonera's ratings reflect its leading position in the Nordic and Baltic regions, complemented by a growing presence in Eurasia, Russia and Turkey. The ratings are also supported by strong liquidity and relatively low, albeit rising, leverage.

TeliaSonera's recent results reflected a satisfactory performance within the mobile operations and the developing markets. However, the company continues to generate around 30% of its revenues and EBITDA from the traditional fixed-line voice, a business that continues to generate sizable fixed-line losses partially compensated by pickup in broadband and growth within the international mobile markets. The Spanish operations, although small in size, have performed below expectations and continue to report sizable losses. Despite leading positions in most of its markets - holding incumbent status in Sweden and Finland - TeliaSonera continues to face intense competition within the mobile business while regulatory intervention remains a concern.

Fitch notes that TeliaSonera's business in the Eurasia region continued to show strong growth in terms of volumes however the agency warns of rising penetration rates and growing competition which are starting to pressure margins. Furthermore the deteriorating economic environment and falling oil prices will slow down growth while currency devaluation risk is rising, particularly in Russia.

A downgrade may occur if net debt/EBITDA exceeds the 2x threshold for a sustained period, a level which Fitch considers the lower boundary for a 'A-' (A minus) rating for a group with TeliaSonera's risk profile. Further developments in the ongoing dispute with the Alfa Group in respect of Turkcell and MegaFon also have the potential to change the ratings and Outlook.

TeliaSonera's liquidity remains strong, as evidenced by its SEK7.6bn cash and SEK13bn of unused credit lines at end-Q308, comfortably covering short-term debt. Debt maturities are well spread throughout the next few years, reducing refinancing risk. Despite management's commitment to maintain a solid investment grade credit rating leverage has been rising with net debt to EBITDA at 1.6x as of end-3Q08, up from 1.2x at FYE07. However, credit metrics remain within an acceptable range for the current ratings.

Posted to the site on 12th December 2008