Moody's Downgrades Telekom Slovenije - on Review for Further Downgrade
Moody's has downgraded Telekom Slovenije's long-term issuer rating and senior unsecured rating to Baa3 from Baa2. Concurrently, Moody's has placed the ratings on review for further downgrade.
The action follows Moody's downgrade of the Republic of Slovenia's government bond ratings to Baa2 from A2 on 2 August 2012. The outlook on the sovereign rating is negative.
With the downgrade of Telekom Slovenije's rating to Baa3 from Baa2, Moody's has removed the one-notch uplift for government support that the company's rating previously benefited from. This reflects the rating agency's view that the Government of Slovenia's ability to support Telekom Slovenije if required has reduced, especially considering that the potential need for support from various stakeholders may be increasing, in light of challenges faced by the domestic banking sector.
Telekom Slovenije's Baa3 rating reflects the company's position as a leading integrated telecom provider in the Slovenian market as well as its growing presence in the SEE region, particularly in Kosovo and Macedonia. The rating also reflects the company's weak operating performance as a consequence of enhanced competitive and regulatory pressures and an adverse macro-economic backdrop, which are affecting its growth prospects and operating margins.
Through the company's recent efforts to cut capital expenditures and dividends, Telekom Slovenije has more recently managed to enhance its free cash flow generation capacity and reduce debt, regaining some of its financial flexibility and improving credit metrics. Going forward, this could be more challenging in light of the more adverse macro economic background.
Telekom Slovenije is a government-related issuer (GRI), and Moody's overlays the company's underlying credit strength (Baa3 equivalent) with its joint default analysis for GRIs. The final rating of Baa3 currently reflects the 'high' default dependence between Telekom Slovenije and the Slovenian government and Moody's expectation of moderate extraordinary government support being made available if required, on account of Republic of Slovenia's 74.15% ownership of the company.
Review for further downgrade
Moody's has placed Telekom Slovenije's ratings on review for further downgrade primarily to assess the impact on its credit standing and liquidity profile of (i) the deterioration in the sovereign's credit profile, and the associated more challenging macro economic environment and domestic operating conditions; as well as (ii) a deteriorating domestic banking sector.
Telekom Slovenije's liquidity profile has historically been relatively weak for an investment-grade credit in light of the absence of long-term committed bank-facilities. Telekom Slovenije's external liquidity sources are composed of a number of short-term bilateral facilities from domestic banks, and their appetite to renew these lines upon maturity may be reduced in light of their weakening credit quality. This means that availability of funding for the company may become less certain and more expensive than in the past. Nevertheless, Moody's notes that the company does not have significant debt maturities until December 2016, when its EUR300 million bond has to be repaid.
The review will also assess the extent to which Telekom Slovenije might be affected by the risk of contagion from a weak macroeconomic environment in Slovenia, which could exert further pressure on the company's revenues and cash flow generation capacity. Moody's notes that around 85% of Telekom Slovenije's consolidated revenues are generated in Slovenia, so the company is highly dependent on the macroeconomic conditions in the country. In addition, Moody's will revisit its GRI dependence and support assumptions as part of the review process.