OTE Debt Rated As Stable - Despite Rising Competition

Fitch Ratings has affirmed Greece-based Hellenic Telecommunication Organizations's (OTE) Long-term Issuer Default rating (IDR) at 'BBB' with Stable Outlook. At the same time, the agency has affirmed OTE's senior unsecured rating at 'BBB'.

The ratings are underpinned by OTE's strong, leading positions in the domestic fixed-line and mobile markets despite rising competition and a slowdown in the local economy. They also reflect the growth of its international mobile assets and its healthy cash flow generation capability.

On the other hand, the ratings also take into account the slowdown in overall growth, the increasingly difficult local regulatory environment and competitive pressure arising from altnets and local loop unbundling. However, rising ADSL pick-up, which reached a subscriber base of 0.925m by Q308, has helped to partly offset the increased competition. Fitch also takes comfort from subsidiary RomTelecom's revenue growth (1.1%) for 9M08, reversing the declining trend in number of fixed lines and retail traffic, which was impacted by competition, mainly from cable operators.

Fitch notes that, despite the higher leverage resulting from its buy-out of minority Cosmote shareholders in 4Q07, the company's business fundamentals remain positive and should allow for gradual de-leveraging in the long term. The latter will be aided by expected healthy free-cash flow generation and planned divestiture of some non-core assets and Cosmofon, its mobile operator in the Republic of Macedonia over the medium-term. Notwithstanding proceeds from its planned disposals, Fitch notes the Cosmote transaction has resulted in limited financial flexibility within the assigned rating level. Fitch believes OTE can benefit from the presence of the new shareholder, Deutsche Telekom (25%), in terms of operational synergies - within mainly Cosmote - although the agency notes it is too early to quantify these synergies.

Cosmote, the mobile arm of OTE, is the main growth driver and continues to outperform in the Greek and international operations. Cosmote achieved solid results in 9M08 with total revenues up 7.4% and a 48% share of group EBITDA. Fitch expects Cosmote to be a growing cash flow contributor to the group, with Cosmote Romania on track to post positive EBITDA in 2008. Cosmote Romania continued to outperform in 9M08, with more than 5.2 million subscribers in total. Cosmote Romania achieved a 21% market share in Q308, although reported blended ARPU was only €5.2 due to aggressive competition on the pre-paid front.

Net debt amounted to €4,790m at end-9M08, up 13.7% from FYE07 due to OTE's increased stake in Cosmote. Fitch estimates group net leverage - defined as net debt/EBITDA - is expected to reach around 2x at FYE08, within the confines of the current rating level. Fitch expects leverage to return to below 2x by FY09. Fitch notes that pursuing a more aggressive dividend distribution programme and share buybacks, rather than applying cash flow generation to debt reduction as expected, would have negative implications on the ratings. Liquidity in the form of cash (€1.25bn at end-9M08), available facilities as well as expected positive free cash-flow generation is good and covers financial obligations until FY11. However, refinancing risk is expected to increase in 2011 as most of the debt repayments are concentrated in the 2011-2013 period.

Posted to the site on 16th December 2008