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O2 sale could be key to EUR15 billion total debt reduction for Telefonica

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Moody's Investors Service expects that Telef nica's sale of O2 plc will be key to improving the company's leverage . The rating agency expects EUR15 billion total debt reduction through 2017 including different cash raising actions such as the O2 sale. Telef nica will likely benefit from exiting the increasingly competitive UK market where it would have had to make significant investment to compete.

Management has committed to reducing reported net debt to EBITDA to 2.35x by year end 2016.

"We expect that a recovery in Telefónica's domestic business will support improved operating performance", said Carlos Winzer, Moody's Senior Vice President. "Spanish GDP growth will continue to spur private consumption growth and Telefónica will benefit from its market leading position and high quality quad-play offerings. Furthermore, recent acquisitions in Brazil and Germany will improve its scale and convergence strategy", added Carlos Winzer.

Telefónica has led convergence of TV, mobile, fixed and broadband services, triggering market consolidation in Spain in response to the launch of its Fusion quad-play product. Telefónica offered large discounts when it first launched Fusion, making other providers reposition their offerings at lower levels, a strategy which benefitted Telefónica: the number of fusion customers rose to 4.2 million in 2015 from 3.7 million in 2014 and Moody's expects that it will reach 5 million by 2015.

Moody's expects that Telefonica´s performance in Brazil will remain strong despite economic weakness. Although the macroeconomic environment in Brazil is weak, Moody's expects that Telefonica Brasil will continue to deliver growth, based on its integrated business model and superior market position. Telefónica has implemented a solid hedging mechanism, supported by the use of derivatives and swaps, and has local currency debt to minimize the negative effect of currency devaluation.

Telefonica's deleveraging strategy will be complemented by further hybrids issuance. This will also strengthen the company's capital structure. Telefónica´s hybrids are likely to retain the 50% equity credit, based on long maturity dates, deep subordination within the capital structure and the ability to defer coupon payments on a cumulative basis if the ordinary dividend is suspended. Given it has issued some EUR5.5 billion of hybrids with a 50% equity credit so far, it has some EUR2.75 billion of equity cushion to support its financial ratios.

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Tags: o2  telefonica  moodys  UK