Moody's Downgrades Telekom Slovenije's Debt Rating; Outlook Negative
Published on: 4th Dec 2013
By: Ian Mansfield
Moody's Investors Service has downgraded Telekom Slovenije's debt ratings and marked the outlook on all ratings as negative.
"We have downgraded Telekom Slovenije's rating to Ba2 because of the company's weak liquidity, given its high reliance on the currently challenged Slovenian banking sector, its reduced cash balance as a result of its larger-than-expected dividend paid in August, as well as the expected cash outflow for spectrum in 2014," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for Telekom Slovenije.
The rating downgrade reflects Moody's view that Telekom Slovenije's liquidity profile remains weak, in light of its high reliance on domestic banks, which increases the company's vulnerability to stress in the Slovenian banking sector.
The company's cash balance, which is mostly placed with Slovenian banks, was reduced following the larger-than-anticipated dividend for the full year 2012, paid in August 2013. The cash balance will be further reduced if the company is successful in securing spectrum in the 2014 auction. Depending on the final amount paid for spectrum, the company may have to raise additional funds or draw on its EUR70 million long-term back-up facility from domestic banks.
In light of the potential cash outflow for spectrum, Telekom Slovenije's free cash flow for debt repayment will be lower and the company will have to rely more heavily on accessing the capital and/or bank markets to refinance its EUR300 million bond maturing in 2016, which will likely be done at higher rates. Moody's notes that the company may mitigate the impact of this extraordinary cash outflow by lowering capex or adjusting its dividend policy.
The downgrade also reflects Moody's concerns around Telekom Slovenije's less predictable financial policy, in light of shareholders' decision to increase the dividend for the full year 2012 against the strategic guidelines established by the Management and Supervisory Boards. In Moody's view, another extraordinary dividend payment in 2014 is unlikely, but it cannot be fully ruled out. Financial policies may be less predictable than in the past, given that the Slovenian government and a number of state-owned firms, which together hold more than 75% of the company, have announced their decision to sell their equity stakes in a process that could be completed in 2014.
Telekom Slovenije's Ba2 CFR 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 Telekom Slovenije's weak operating performance as a consequence of enhanced competitive and regulatory pressures and an adverse macroeconomic backdrop, which are affecting the company's growth prospects and operating margins. The rating also reflects Telekom Slovenije's weak liquidity in light of the company's large exposure to the Slovenian banking sector. Telekom Slovenije is a government-related issuer (GRI), but the rating does not currently benefit from any support uplift.
The negative outlook on the ratings primarily reflects the potential pressures on Telekom Slovenije's liquidity profile as a result of its reliance on the domestic banking sector, as well as 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.
The negative outlook also reflects the challenging macroeconomic environment in Slovenia as well as the fierce competition and tough regulation affecting the country's telecoms market. Telekom Slovenije generated around 84% of its consolidated EBITDA in Slovenia in 2012, and therefore its ability to decouple from a weak economy and banking sector is very limited.
The negative outlook also reflects the uncertainties regarding the company's shareholding structure in light of the government's decision to sell its majority stake in Telekom Slovenije.