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Fitch Affirms Deutsche Telekom'd Ratings with a Stable Outlook
Published on:
Fitch Ratings has affirmed Deutsche Telekom's (DT) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. Fitch has also affirmed DT's senior unsecured rating at 'BBB+' and Short-term IDR at 'F2'. This includes the debt issued by Deutsche Telekom International Finance and guaranteed by DT.
DT's credit profile is shaped by a combination of operating in competitive and mature markets with virtually no growth potential and a reasonably prudent financial policy.
German operations have been resilient but mild pressures are likely to continue. In the European context, Germany is a relatively stable market but is not totally immune to a weak macroeconomic outlook and the lack of growth drivers. The company benefits from relatively high domestic market shares which are under competitive pressure. Fixed-line disconnections continue to weigh on revenues while the German mobile market is unlikely to expand significantly. Pockets of growth such as rising broadband accesses, IP-TV and mobile data have been insufficient to compensate for the weakness of traditional services. Overall, Fitch expects domestic revenues to remain under 2%-3% per annum pressure in the short-to-medium term with EBITDA more resilient benefiting from an on-going focus on cost cutting.
US operating performance is a concern. However, on a positive note, this subsidiary remains highly free cash flow generative and capable of internally financing substantial LTE roll-out capex. The key unaddressed issue is loss of valuable contract subscribers; these have been haemorrhaging at a rate of over half a million per quarter. DT's branded contract subscriber base shrank by 9.2% yoy to 21.3m in Q212, and low-ARPU pre-paid and machine-to-machine additions were unable to compensate for this loss. The company hopes to change its fortune in this market with the LTE roll-out with the LTE service slated for launch in 2013. However, the success of this strategy remains untested, and the company may find it challenging to fully catch up with larger peers in terms of data capacity. DT estimated that more than85% of LTE-covered population would be serviced with 20MHz at launch.
A US capex spike is likely to be manageable and can be internally financed by T-Mobile USA. DT estimated that an LTE roll-out across the US would require an overall capex of USD4bn, however, only USD1.4bn of incremental capex. Given a tight roll-out deadline, most of this would be spent in 2012-2013 implying incremental USD700m per annum expenditure. This is a relatively modest cash call compared to T-Mobile USA's cash contribution (adjusted EBITDA less capex) of USD2.7bn and USD2.6bn in 2010 and 2011 respectively, and on the backdrop of already inflated capex into 3G/HSPA+ during this period.
DT is not facing bright growth prospects in its other markets. DT's European subsidiaries have sustained reasonably robust operating performance; however, the company's European franchise is shrinking in revenue and EBITDA terms. Q212 reported revenues and EBITDA posted contraction of 5.9% and 6.2% yoy, respectively. To a large extent these declines were driven by OTE but the rest of Europe was also under pressure. It is unlikely that this negative trend can be easily reversed.
DT's public leverage target remains unchanged at between 2.0x- 2.5x adjusted net debt/EBITDA but Fitch expects the company to be managing its leverage close to the lower boundary of this range in future. Given a difference between adjusted and reported EBITDA, and also net debt calculus between Fitch and DT, Fitch's unadjusted leverage metrics are typically 0.3x-0.4x higher than DT's adjusted ratios.
Tags: [deutsche telekom] [t-mobile usa]
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