Fitch Affirms France Telecom Debt with Stable Outlook

Fitch Ratings has today affirmed France Telecom's (FT) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A-' respectively. The Outlook is Stable. Fitch has simultaneously affirmed FT's hybrid instruments, the Titres a Duree Indeterminee Remboursables en Actions (TDIRA), at 'BBB+'. The agency has downgraded the company's Short-term IDR to 'F2' from 'F1'.

The downgrade of the Short-term IDR reflects the realignment of the rating with FT's European peers and does not imply a deterioration of the company's credit fundamentals.

FT's Long-term IDR reflects the incumbent's leading position in all segments in France and Poland, the diversity of its international businesses and management's conservative financial policy.

"FT's business model is so far proving more resilient in the downturn than some other European peers, primarily due to a material exposure to its domestic market," says Richard Petit, Associate Director, Fitch's TMT team. "France's comparatively lower mobile penetration and competition, a higher share of mobile postpaid customers than other European markets and a strategy focused on delivering premium content to both mobile and triple-play subscribers is helping to underpin results."

The Stable Outlook reflects Fitch's expectation that despite the anticipated pressures on revenue and EBITDA, FT will continue to contain operating costs inflation to maintain cash flow generation at a high level.

While FT's French operations look more resilient to the recession, its mobile business has still to see, to some degree, the impact of the new round of mobile termination rates and the loss of the iPhone's distribution exclusivity to the top line as well as margin compression, as costs to acquire and retain customers increase. In domestic fixed-line after three quarters of material operational weakness due to the merger with Neuf Cegetel, SFR is expected to offer some effective additional market competition. Fitch expects FT's other businesses will continue to operate in challenging environments (in particular in Poland, Spain and the UK), with regulatory and competitive pressures combined with a difficult economic situation likely to keep headline revenue and EBITDA under pressure

Gross Operating Margin (GOM) and organic cash flow generation strengthened further in 2008 due to ongoing cost inflation containment. In spite of the higher cash dividend paid in 2008 (due to the interim dividend paid in September 2008 on FY08 earnings), FT managed to reduce its net debt level to EUR35.8bn from EUR37.9bn, resulting in a net debt/GOM of 1.85x down from 1.99x. On 29 April 2009, FT management confirmed its 2009 expectations of organic cash flow in excess of EUR8bn despite pressure on revenues, capital expenditure/sales ratio below 12% and reiterated its target net leverage (net debt/EBITDA) of below 2x..

At FYE08, reported gross debt, including financial derivatives, amounted to EUR41.0bn. FT's liquidity was robust with cash and cash equivalents of EUR5.3bn and EUR9.1bn available under its committed facilities (including EUR8bn expiring in June 2012). FT's ample liquidity covers short-term debt of EUR8.2bn. Fitch notes that after 2009, FT does not have any material repayments due within the next five years. So far in 2009, FT has issued approximately EUR4bn worth of bonds in four different currencies. The company's liquidity is supported by stable and large free cash flow before dividends (Fitch measure) of approximately EUR7.8bn.

Posted to the site on 6th July 2009