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Moody's changes the outlook on Poland's TPSA to negative

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Poland based Telekomunikacja Polska (TPSA) has had its debt ratings outlook changed to negative by Moody's reflecting the agency's concerns that TPSA will face an increasingly challenging operating environment, mainly due to the fiercely competitive nature of the Polish mobile and fixed market segments, and tough regulation.

"Today's action specifically reflects our concern that expected further declines in revenues in 2013, as a result of competitive and regulatory pressures, will negatively affect TPSA's financial metrics," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for TPSA. "As a result, we question the ability of the company to continue to sustain historically strong financial metrics," explains Mr. Winzer. "A significant deviation in reported net debt/EBITDA ratio above management's guidance of 1.5x in 2013 could trigger a rating downgrade."

TPSA's recent quarterly performance suggests that a more challenging operating environment is developing in Poland, in which the company suffered a c. 5% decline in revenues and c. 9% decline in reported EBITDA in Q3 2012 compared with Q3 2011. This challenging environment will test management's ability to successfully execute its business and financial strategies.

The expected deterioration in TPSA's operating performance reflects (1) mobile termination rate (MTR) cuts imposed by the Polish telecoms regulator for 2013 (TPSA and PTC, Poland's third-largest mobile operator by market share, will see their MTRs cut by 33% at the start of 2013 and then by a further 52% to a final PLN0.0429 per minute in July 2013); (2) revenue declines in the enterprise segment; and (3) a fiercely competitive mobile market, in which the launch of unlimited flat-rate mobile offers in Q2 2012 has affected TPSA's revenues.

Given these adversities, Moody's said that it will closely monitor TPSA's ability to accelerate cost-cutting initiatives, in addition to its cut in dividends, and capital expenditure reductions or other cash preservation measures in the short term to offset the more adverse operating conditions and comply with the ratio guidance for the current rating level. Moreover, Moody's will monitor TPSA's operational strengths and the extent to which the company remains well placed at the current rating level to overcome the tough regulatory environment, as well as cope with the increased competitor activity in both the fixed and mobile markets in Poland.

TPSA's financial flexibility has historically provided it with a robust position from which to deal with any contingent liabilities. However, Moody's perceives that TPSA's operating environment is one of increased business risk, which the company will have to offset with a sustainably strong financial profile.

TPSA has publicly committed to maintaining a maximum reported net debt/EBITDA ratio of 1.5x or below. Moody's will closely monitor (1) the extent to which the company might exceed this level in 2013, and (2) when it will return to a reported net debt/EBITDA ratio of below 1.5x as a result of its underlying cash flow generation and prudent financial policies. In addition, Moody's does not expect TPSA to make any large-scale acquisitions, although minor domestic bolt-on transactions are possible.

TPSA's rating and outlook are currently aligned with those of its controlling parent company, France Telecom, which exerts significant influence on TPSA. Given the increasing business risk in TPSA's operations and more challenging operating conditions, Moody's expects TPSA to sustain strong financial metrics in order to maintain the current A3 rating, which is at the same level as France Telecom's final rating, but one-notch higher than France Telecom's standalone BCA of baa1.

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