Moody's: Telecom Italia's Rating Not Affected by Italian Government Downgrade
Moody's Investors Service has said that Telecom Italia's Baa2 rating (negative outlook) is not immediately affected by the weakening of the Italian government's creditworthiness.
However, given the multiple channels of contagion that exist between the sovereign and corporate issuers domiciled in Italy, Moody's considers that the weakening of the Italian government's creditworthiness heightens the risks associated with the execution of Telecom Italia's strategy. This strategy includes an ambitious deleveraging target and a gradual improvement in the company's domestic operating performance. Moody's expects contraction in the corporate segment as well as reduced consumer spending capacity as a result of the recession in Italy and government austerity measures to continue to exert pressure on Telecom Italia's domestic revenues, which will challenge the company's ability to reduce its debt and improve its credit metrics this year.
The telecom sector in Italy has so far this year proven more resilient than other consumer good sectors to the recession in the country and government austerity measures. However, these challenging conditions will continue to affect the corporate sector as well as consumer spending capacity in the country, which could adversely affect Telecom Italia's recently improving domestic operating performance. This is critical to the company's cash flow generation capacity and will therefore determine its ability to achieve its committed deleveraging plan.
Telecom Italia is, therefore, facing stronger headwinds in its domestic market and Moody's remains concerned about the company's ability to improve its financial ratios. Negative pressure on the rating could arise if Telecom Italia were to deviate from its debt reduction plan, which includes reducing its reported net debt to approximately EUR27.5 billion by the end of 2012 and approximately EUR25 billion in 2013. More specifically, Moody's had previously indicated that a rating downgrade could result if the company's retained cash flow (RCF)/net adjusted debt ratio were to fall below 20% and/or its net adjusted debt/EBITDA ratio were to fail to gradually improve towards 2.5x in the medium term.
A further downgrade of Italy's rating would also likely trigger a downgrade of Telecom Italia, given the company's high exposure to the Italian market as a result of low international diversification.
The weakening of the Italian government's creditworthiness is also likely to result in increasingly challenging bank and capital market conditions, which could eventually restrict Telecom Italia's ability to access liquidity. However, Moody's acknowledges the company's currently ample access to liquidity due to its current cash position of more than EUR5 billion and EUR7 billion in available bank funding, which support its debt maturities through 2014.
In addition, Moody's takes comfort from Telecom Italia's diversified sources of funding, including the recently signed EUR4 billion forward start facility maturing May 2017, as well as from the fact that a significant portion of its committed lines are with international banks.
In order to offset pressures on its domestic operations, Moody's would expect Telecom Italia to continue to cut operating expenditures, and enhance both its fixed and mobile service offerings through competitive pricing and bundled offers. The rating agency notes that the company will continue to benefit from its growing business in Brazil and Argentina, although the cash repatriation from Latin America (LatAm) is very limited.
More specifically, Moody's would expect Telecom Italia to comply with management's guidance to the market, which for 2012 includes broadly stable, consolidated organic group revenues of approximately EUR29.5 billion and organic EBITDA of EUR12.3 billion. Moody's would also expect management to maintain a reported group EBITDA margin of more than 40% and to use free cash flow to further reduce its debt at a rate of approximately EUR2 billion per year, as a priority over shareholder remuneration. This is in line with the company's continued commitment to debt reductions and financial discipline. In fact, management has recently publicly stated that Telecom Italia is on track to achieve cumulative reported EBITDA minus capital expenditure of approximately EUR22 billion (80% of it generated in Italy) in 2012-14, which will enable the company to reduce its reported net debt to around EUR25 billion by 2013.
Although Telecom Italia is making ongoing efforts to cut its operating costs in Italy, the company's domestic revenues continue to decline (in the single digits in percentage terms) and there is uncertainty as to when they will stabilise. Telecom Italia's international diversification into LatAm (with 67% ownership of TIM Brazil and 23% ownership of Telecom Argentina) has contributed to the company's revenue growth, but might not be enough to offset the pressure on its cash flow generation prospects in Italy.