Telekom Austria Debt Ratings Downgraded Following Radio Spectrum Auction
Telekom Austria's debt ratings have been downgraded to Baa2 from Baa1 by the Moody's ratings agency following the mobile network's EUR1 billion debt-financed acquisition of mobile spectrum in the recent auction.
Moody's said that it considers that this acquisition will have a material negative effect on the company's financial ratios.
The outlook on the ratings is stable.
"We are downgrading Telekom Austria's ratings mainly because its recent debt-financed acquisition of mobile spectrum will have a negative impact on the group's credit metrics," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telekom Austria. "Although Telekom Austria's mobile business will benefit from the additional spectrum, the debt-financed nature of the acquisition increases the group's financial risk beyond the level of tolerance for the previous rating."
The rating downgrade reflects the negative financial implications of Telekom Austria's EUR1 billion debt-financed spectrum acquisition. As a result of the acquisition, for which the group paid more than twice the amount Moody's had expected, Telekom Austria's leverage ratio, measured by gross debt/EBITDA, will deteriorate this year to around 3.4x from 2.9x in 2012. This exceeds the maximum level of 3.0x that Moody's had indicated for the previous rating category.
Moreover, Moody's expects that Telekom Austria's operating performance will remain weak, affected by regulation, fierce competition and the adverse macroeconomic conditions in Austria as well as in other countries in which the group operates.
However, despite the negative financial implications of the acquisition, Moody's recognises that the new spectrum acquired provides Telekom Austria with a unique strategic advantage. The company acquired 67% of the 800MHz spectrum at the September 2013 auction (the first time this spectrum has been offered), as well as substantial spectrum in the 900MHz and 1800MHz bands. As a result, Telekom Austria is in a strong position to undertake an efficient roll-out of a 4G network across Austria and will also benefit from better coverage and greater speed for data transmission. This supports the group's business strategy, which focuses on mobile and fixed broadband investments. However, Moody's does not expect the financial benefits from the acquired spectrum to materialise before 2015.
Telekom Austria's Baa2 rating is supported by (1) the group's scale; (2) its position as a strong integrated player in its highly competitive domestic telecommunications market and a geographically diversified leading mobile operator in Austria and the countries in which it operates in eastern Europe; and (3) its continued solid cash flow generation.
Moody's expects that despite its weak operating performance, Telekom Austria will retain its strong market position in Austria, weathering macroeconomic and competitive pressures in the markets where it operates, and that management will preserve the group's financial strength within the publicly stated ratio guidance. Moody's expects Telekom Austria's revenue to decline slightly in the short to medium term, broadly offset by the group's ongoing efforts to sustain margins and cash flow. In addition, the rating agency would expect the group to manage its strategic investments, as well as shareholder remuneration, within the financial ratio guidance for the Baa2 rating level.
From a liquidity risk management perspective, Telekom Austria's liquidity profile will become more constrained as Moody's notes that over the next month, the group faces approximately EUR1 billion of spectrum payments. However, Telekom Austria has around EUR625 million of cash and the group's external liquidity sources include around EUR1 billion worth of committed long-term bank facilities. These are unutilised, and can be drawn at any time, not being subject to material adverse change (MAC) clauses or financial covenants.