Fitch Revises Telecom Italia's Outlook to Negative on Weak Italian Economy
Fitch Ratings has revised Telecom Italia's Long-term Issuer Default Rating (IDR) Outlook to Negative from Stable. The IDR and senior unsecured rating, as well as Telecom Italia Capital's and Telecom Italia Finance SA's senior unsecured ratings are affirmed at 'BBB'.
Fitch said that the Negative Outlook reflects the limited headroom TI has amidst a worsening macroeconomic backdrop which could reduce demand for telecom services and negatively impact TI's domestic revenue and profitability.
In addition, any extended period of sovereign weakness could impair the company's access to capital markets to refinancing debt maturities.
Any expectation that TI could not keep leverage as measured by unadjusted net debt to EBITDA (excluding Telecom Argentina) sustainable below 3.0x could result in TI's IDR being downgraded to 'BBB-'. Another key consideration for further negative rating action would be a worsening of the company's domestic business's operating and financial profile.
"Telecom Italia is at risk from any additional Italian government austerity measures given the limited headroom it has at the current rating level," says Damien Chew, Senior Director in Fitch's European Telecoms, Media and Technology team. "However, Fitch recognises that management has capex flexibility in its domestic fixed business to protect free cash flow generation."
TI's current rating is not directly affected by the Italian sovereign rating. A multi-notch downgrade of the sovereign rating would have to take place before Telecom Italia's rating would be directly impacted.
TI's key strength is its strong market position in the domestic fixed line business, which underpins TI's high domestic EBITDA margin and cash flow generation. A lack of cable competition in Italy means that TI has the ability to phase capex as required without significantly impacting its competitive position. This gives TI an important financial lever, in perserving cash flow generation at times when EBITDA comes under pressure.
TI can also rely on the growth potential of its mobile operations in Brazil, along with management's disciplined approach to operating costs and capex, to offset the drag from the domestic mobile business.
Fitch anticipates leverage - as measured by unadjusted net debt to EBITDA, excluding Telecom Argentina -- to reach 3.0x at the end of 2011, after factoring in payments for Italian spectrum (partly deferred), the recently announced Brazilian acquisition, AES Atimus for EUR700m and the TIM Brasil capital increase which resulted in a net cash inflow of EUR200m. Fitch's base case forecasts show leverage reducing moderately to 2.8x by the end of 2013. However, Fitch scenario analysis shows that under certain conditions, TI's leverage could breach the key 3.0x threshold.
For the purpose of calculating leverage and credit metrics, Fitch does not take into account the full contribution of Telecom Argentina, where TI has a 21.1% indirect economic interest.
Liquidity at TI remains healthy. Excluding cash held at its Brazilian and Argentine subsidiaries, TI had EUR4.2bn of cash and cash equivalents on its balance sheet at the end of June 2011 as well as EUR7.8bn undrawn committed facilities. Together, this should allow TI to cover EUR10.4bn of debt maturities until the end of 2013.