Moody's Downgrades Telecom Italia's Ratings; Negative Outlook
Moody's Investors Service has downgraded Telecom Italia's debt ratings to a non-investment grade.
The debt ratings agency said that the rating downgrade follows the company's failure to strengthen its balance sheet and the accompanying announcement on 3 October of the resignation of its Chairman and CEO, Mr. Bernabe.
"We are downgrading Telecom Italia's ratings primarily because the recent resignation of the CEO has increased uncertainty regarding the company's ability to strengthen its balance sheet sufficiently to mitigate the declining trend in its domestic revenues and EBITDA," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telecom Italia.
Telecom Italia's ratings were placed on review for downgrade on 8 August, driven primarily by the deterioration in its domestic revenues and EBITDA resulting from the worsening economy, higher unemployment, adverse regulatory effects and more intense competition in Italy. The review was also driven by Telecom Italia's inability to meet its domestic and group EBITDA targets, with a high likelihood of a downgrade if the company failed to meet ambitious plans to reduce debt and improve financial metrics by year-end 2013.
The rating action reflects the resignation of Telecom Italia's CEO, which in Moody's view reflects a lack of support from shareholders for a material capital increase to strengthen the company's balance sheet. As a result, an improvement in Telecom Italia's credit quality no longer appears likely.
The remaining options available to strengthen the credit, whether related to capital or operating plans, regulation, financial strategy or asset sales, will take time to implement, even if successful. There will be uncertainty and implementation risk until the new CEO has appraised its options, set out and started to deliver on a new strategy, and this is reflected in the negative outlook.
In Moody's view, there is increased uncertainty regarding the company's strategy and ability to reverse the declining trend in its domestic revenues and EBITDA. This deterioration is a result of the continued weakening of Italy's economy, higher unemployment, adverse regulatory effects and more intense competition in the country. Moreover, the downgrade reflects Moody's expectation that Telecom Italia's domestic revenues and EBITDA will deteriorate further and that the company will fail to meet its domestic and group EBITDA targets for 2013.
Telecom Italia's business risk has increased as a result of the expected further deterioration in the company's operating performance, as well as the low visibility regarding when management might be able to reverse the declining trend.
As a result, Telecom Italia is likely to struggle to achieve its reported net financial position target of less than EUR27 billion by year end.
In particular, Moody's notes that management is struggling to offset the negative effect on the group of the tougher-than-expected operating conditions for its domestic mobile business in 2013. This business has experienced intensified competitive pressure and adverse regulation.
Moody's expects operating conditions in Italy to remain challenging for some time, and recognises the limited options that Telecom Italia has to strengthen its balance sheet. Major shareholders appear opposed to a material capital increase and could prefer Telecom Italia to strengthen its balance sheet in combination with carrying out an effective restructuring of its domestic operations. Some of these measures will take time to implement and imply substantial execution risk.
Therefore, management may find it difficult to meet its deleveraging commitment of a reported net financial position/EBITDA of below 2.0x in the next 24 months.