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Portuguese Telecom Market Sees Increased Pressure in 2011

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Fitch Ratings has said that it believes that the effects of a prolonged period of austerity will weigh upon Portuguese telecoms service revenues, as indebted domestic households have less disposable income. Fitch reiterates that there is no direct rating linkage between the ratings of Portugal Telecom (PT) and the Portuguese sovereign debt rating. However, the ratings can be influenced by an underlying correlation with domestic consumer confidence.

Portugal's telecoms service revenues have fallen by an estimated 3% (including both fixed and mobile), driven by mobile which is down approximately 6% in 2010. As such, they have fared better than some other southern European markets, such as Greece. PT's domestic performance has been largely in line with the overall market, as fixed-line revenues rose 0.4% in the first nine months of the year, and mobile revenues declined by 7.9%. Fitch notes that regulatory interconnection reductions, as well as economic conditions, have contributed to the decline.

Southern European telecoms markets are diverging from those in northern Europe. The Southern European markets have been affected by a more prolonged period of austerity measures, particularly as they are relatively mature and were struggling to find headline growth before the recession.

Consistent with Fitch's double-dip expectations for Portugal in 2011, PT may see domestic service revenue deterioration accelerate in 2011. To test the group's resilience to the prospective successive downturn, Fitch ran a stressed scenario of a 10% decline in turnover. Under this scenario, without drastic action by management to address the cost base, Fitch would expect PT's unadjusted net leverage to rise to around 3x - a level similar to Telecom Italia. Although a fall of this magnitude for a now domestic-focused PT looks severe, precedents have been seen in the European telecoms portfolio, with Greek telecoms' annual service revenue declines of as much as 18%, and Spanish mobile revenues down around 5% in 9M10.

Fitch acknowledges that each market has different dynamics, and that this Greek example was mainly due to domestic consumers opting for cheaper mobile tariffs. We would expect such a trend to be more muted in Portugal. Nevertheless, the scale of decline is not without precedent. If PT's financial profile were to deteriorate to such an extent, it would put pressure on PT's current rating, but Fitch would also take into account recovery prospects at the time.

PT's liquidity position is good. Existing cash of around EUR1.7bn plus EUR4.5bn initial proceeds from the disposal of Brazilian mobile business Vivo, saw the company with cash liquidity of EUR6.2bn at 9M10, with a further EUR952m reported in committed bank facilities. Further Vivo instalments of EUR3.0bn due between December 2010 and October 2011, should be considered in the context of the EUR3.7bn that PT has earmarked for investment in Brazilian operator, Oi, special dividend payments of EUR1.5bn due in 2010/2011, and annual ordinary dividends in the region of EUR600m. Short-term debt maturities currently amount to EUR836m and an aggregate EUR2.3bn of bonds mature in 2012 and 2013.

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