Fitch Affirms Deutsche Telekom at 'BBB+'; Outlook Stable

­Fitch Ratings has today affirmed Deutsche Telekom's (DT) Long-term Issuer Default rating (IDR) at 'BBB+' with a Stable Outlook. Its other ratings have been affirmed at senior unsecured 'BBB+' and at Short-term IDR 'F2', including the debt issued by Deutsche Telekom International Finance B.V. and guaranteed by DT.

DT retains a strong position as an incumbent operator in Germany, but faces competitive and pricing pressures in the shrinking domestic market. The company continues to dominate in the telecoms landscape, and has managed to stabilise its retail broadband market share. However, fixed-line revenue and EBITDA in absolute terms continued to show weaknesses, declining 5.4% and 3.1% y-o-y, respectively, in H109 and moderate pressures are likely to continue over the medium term.

DT remains a key infrastructure provider in Germany, and this role may increase in future if regulation remains favourable on the company's new VDSL network. DT provides an access network that currently supports 22 million out of 24.2 million broadband accounts in Germany. However, the company is now facing a heightened threat from cable operators which are emerging as a strong infrastructure-based competitor.

The German mobile market continues to stagnate which has taken its toll on all operators. DT's domestic mobile service revenues declined 0.9% y-o-y in H109 due to weak average revenue per user as sluggish minute of use growth and insufficient data contribution failed to fully compensate price erosion. With the headline mobile penetration exceeding 130% in early 2009, the market is close to saturation.

DT's ratings are supported by its strong geographic and business diversification. DT is an established telecoms player in all its markets. The mobile business which Fitch views as having better defensive qualities than other segments, accounted for 57% of net revenue in H109. Overall, DT's international presence is strong, with the share of international revenue at 79% in mobile and 20% in fixed-line.

However, some of these operations, particularly in the US mobile market, are experiencing increased competition and maturity, with US subscriber growth and revenue stagnating. With its below-average scale in the US, continued high churn and 3G coverage lagging behind peers, DT faces a challenge to stabilise and grow operating margins in the short- to medium-term. With new frequency auctions unlikely in the US, migration to Long-term evolution technology may not be easily achievable.

DT is expected to remain strongly free cash flow-(FCF) generative. However, its FCF margin is likely to be in low single-digits, and in the short-term it may be hit by one-off frequency spends. Although prices on new radio bands in the UK and Germany remain unclear, Fitch estimates that in Germany where the frequency auction is scheduled for 2010 the cost for DT may be in the range of EUR500m.

Fitch estimates that DT's net debt/EBITDA is likely to increase to 2.5x by end-2009 from 2.4x at end-2008, a result of weaker organic EBITDA. However, this remains consistent with DT's ratings. As the company is close to the bottom of its target leverage range calculated using in-house metrics, de-leveraging from this level is unlikely. Fitch notes that DT's UK operations will likely be de-consolidated in 2010 which will have a slightly negative impact on leverage.

DT's liquidity remains strong. At end-H109 it had EUR4.2bn cash and EUR15.2bn of unused bilateral credit lines (excluding those for Hellenic Telecommunications Organization S.A. (OTE)), with a three-year rolling maturity. Long-term debt maturities are evenly spread with a EUR6.8bn peak in 2011.

Posted to the site on 28th October 2009