Fitch Affirms Portugal Telecom Debt Ratings with a Negative Outlook
Published on: 3rd Apr 2012
Note -- this news article is more than a year old.
By: Ian Mansfield
Fitch Ratings has affirmed Portugal Telecom's Long Term Issuer Default Rating (IDR) at 'BBB' with a Negative Outlook. The senior unsecured rating of Portugal Telecom Finance International's bonds has also been affirmed at 'BBB.'
Portugal Telecom continues to perform within Fitch's expectations, with ongoing pressures on its domestic business offset to some extent by growth in the international (non-Brazilian) businesses and good dividend income from associate interests - primarily Angolan mobile operator, Unitel (Fitch's leverage calculation excludes the consolidation of Oi, but includes associate dividend income).
The somewhat uncertain nature of associate dividends was highlighted in 2011. Fitch expected a sizeable dividend receiPortugal Telecom to have been received from the company's principal Brazilian interest, Oi. However, the corporate restructuring taking place at Oi throughout 2011 resulted in the suspension of dividends, with a shortfall in associate dividend receipts adding an estimated 0.3x to unadjusted net debt EBITDA leverage in 2011. Nonetheless, receipts from Unitel appear fairly consistent and payments from Oi are expected to resume in 2012.
Near-term rating pressure is driven by Portugal's sovereign rating ('BB+'/Negative) given the degree to which sovereign pressures can influence domestically orientated corporates.
Portugal Telecom's underlying operational and financial performance is likely to continue to support a 'BBB' rating despite Fitch's assumptions of high-mid single digit revenue declines in the domestic business over the next two years. Under Fitch's methodology, leverage was 2.6x at YE11, and is expected to trend around 2.5x, sitting reasonably well within a 3.0x downgrade threshold.
Domestically, Portugal Telecom remains under pressure in the face of a difficult economy and competitive pressures. However, the residential (fixed line) business is growing at above 5% year-on-year, which is impressive given the negative patterns established at most of its European peers. A progressive approach to fibre build and a successful IPTV product has resulted in the company building a TV base of over 1m customers in roughly four years, despite the presence of a strong cable operator. This approach has enabled the company to stabilise its PSTN subscriber base, while many incumbents continue to face material fixed access attrition.
However, its Portuguese consumer mobile and enterprise businesses are faring less well, with FY11 revenues down 11.2% and 9%, respectively. In mobile attrition is being driven both by MTR cuts and what has proven to be a high correlation between mobile expenditure and the economy. With the recession expected to continue at least through 2012 and potentially into 2013, revenues from these divisions are expected to remain under pressure.
Liquidity is good with cash of approximately EUR4bn at YE11 and approximately EUR1bn of untapped bank lines. Gross debt maturities of EUR3.6bn through 2013 appear adequately covered if access to debt markets remains sporadic, given sovereign concerns. The company's 2016 5 5/8ths maturity currently yields over 7% in the secondary market - which although high compared with 2011's average cost of gross debt of 4.3%, suggests access to new capital exists in case of need.