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Telekom Slovenia Debt Ratings Downgraded on Weak Local Banks

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Moody's Investors Service has downgraded Telekom Slovenije's senior unsecured rating to Ba1 (LGD4, 50%) from Baa3 and lowered the baseline credit assessment (BCA) to ba1 from baa3.

Concurrently, Moody's has assigned a Ba1 corporate family rating (CFR) and Ba1-PD probability of default rating (PDR) to the company and has withdrawn the Baa3 long-term Issuer Rating. The outlook on all ratings is negative.

"The rating downgrade reflects Telekom Slovenije's weaker liquidity profile as a result of the deterioration in the credit quality of some of the largest Slovenian banks," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for Telekom Slovenije. ­The rating also reflects ongoing weak operating and financial performance that is due to competitive pressures and difficult macroeconomic conditions in the company's markets.

"Most of Telekom Slovenije's EUR100 million of cash and deposits as of December 2012 are placed with domestic banks, while it also relies on domestic banks for EUR70 million in back-up liquidity. This increases the company's vulnerability to stress in the Slovenian banking sector, and we view its liquidity profile as no longer being consistent with an investment-grade rating," adds Mr. Palacios. More positively, Moody's notes that Telekom Slovenije has no capital market debt redemptions until December 2016, when its EUR300 million bond has to be repaid.

In Moody's view, the risks for depositors in some large Slovenian banks has increased.

Telekom Slovenije's rating reflects the company's position as a leading integrated telecom provider in the Slovenian market as well as its presence in the South East Europe (SEE) region, particularly in Kosovo and Macedonia. The rating factors in the company's sluggish operating performance as a consequence of enhanced competitive and regulatory pressures and an adverse macroeconomic backdrop, which are affecting its growth prospects and operating margins. The rating also reflects the weakening liquidity in light of the company's large exposure to the Slovenian banking sector. Moody's expects that the company's financial ratios will be consistent with the Ba1 rating, with adjusted debt/EBITDA at around 2.0x and adjusted retained cash flow (RCF)/debt above 35%.

Telekom Slovenije is a government-related issuer and its rating 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 the Republic of Slovenia's 72.4% ownership of the company. The rating does not benefit from any support uplift, as Moody's believes that following its downgrade to Baa2 (negative outlook) in August 2012, the government's ability to support Telekom Slovenije if required has reduced. This partly reflects that the potential need for support from various stakeholders may be increasing, in light of the problems facing the domestic banking sector.

The negative outlook primarily reflects the potential pressures on Telekom Slovenije's liquidity profile as a result of its reliance on the domestic banking sector and the very weak credit profiles of Slovenian banks. Longer term, if access to capital markets and bank lending becomes constrained as a result of diminished investor or lender confidence, the company's liquidity profile could face further pressures. This is relevant for the company because it will have to rely on accessing capital and/or bank markets to refinance its 2016 bond upon maturity given its expected limited free cash flow generation.

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