Madrid, February 02, 2012 -- Moody's Investors Service has today affirmed the long-term global
scale ratings of Telefónica S.A. (Telefónica)
and its fully guaranteed subsidiaries. Moody's has changed to negative
from stable the outlook on all ratings of Telefónica and its fully
guaranteed subsidiaries. Concurrently, Moody's has
lowered the national scale rating (NSR) of Telefónica's fully
guaranteed subsidiary Telefónica Finanzas México,
S.A. de C.V. to Aa1.mx from Aaa.mx
with a stable outlook. The short-term ratings of Telefónica
and its fully guaranteed subsidiaries remain unchanged.
Moody's maintains the following ratings on Telefonica S.A.
and its following affiliates:
Senior Unsecured (domestic currency) ratings of Baa1
Senior Unsecured Bank Credit Facility (domestic currency) ratings of Baa1
Commercial Paper ratings of P-2
Telefonica Europe B.V.
BACKED Senior Unsecured (domestic and foreign currency)ratings of Baa1
BACKED Senior Unsecured MTN Program (domestic currency) ratings of (P)Baa1
BACKED Senior Unsecured Bank Credit Facility (foreign currency) ratings
of Baa1
BACKED Senior Unsecured Shelf (foreign currency) ratings of (P)Baa1
BACKED Commercial Paper (domestic currency) ratings of P-2
Telefonica Finance USA LLC
BACKED Preferred Stock (foreign currency) ratings of Baa3
Telefonica Emisiones S.A.U.
BACKED Senior Unsecured (domestic and foreign currency) ratings of Baa1
BACKED Senior Unsecured MTN Program (domestic currency) ratings of (P)Baa1
BACKED Subordinate MTN Program (domestic currency) ratings of (P)Baa2
BACKED Senior Unsecured Shelf (foreign currency) ratings of (P)Baa1
Downgrades:
Issuer: Telefonica Finanzas Mexico, S.A. de
C.V.
Senior Unsecured Medium-Term Note Program, Downgraded to
Aa1.mx from Aaa.mx
RATINGS RATIONALE
"Today's change to negative outlook reflects our increasing concern
related to Spain's macroeconomic environment and the impact that
the new austerity measures might have on consumer spending, which,
together with the tough domestic competitive environment, will most
likely translate into further pressure on Telefónica´s revenues,"
says Carlos Winzer, a Moody's Senior Vice President and lead analyst
for Telefónica. "Although Telefónica has taken decisive
measures to mitigate the difficult operating environment in Spain,
we expect continued pressure on Telefónica's revenues, which
could challenge the company's ability to sustain credit metrics commensurate
with the current rating," explains Mr Winzer. Measures taken
by the company include a substantial shareholder remuneration cut in 2012,
planned assets disposals, improved working capital management and
operational expenditure reduction initiatives.
The negative outlook also reflects Moody's expectation that Telefónica's
financial ratios will remain relatively tight for the rating category,
despite the group's recently announced cut in dividends.
This tightness leaves limited headroom to absorb (i) any increased competitive
and/or regulatory pressures; or (ii) weaker domestic consumer and
business revenues. In order to offset pressures on its domestic
operations, Moody's expects Telefónica to continue to cut
operating expenditures, and enhance both its fixed and mobile service
offerings through competitive pricing and bundled offers. In addition,
Moody's expects slight upward pressure on Telefónica's capital
expenditure requirements, although at this point within its plan
to invest a maximum accumulated amount of EUR27 billion from 2011 to 2013.
This anticipated rise in capex is needed to further enhance Telefónica's
broadband network, which will support the company's future
revenue growth.
The Baa1 rating continues to acknowledge Telefónica's large
size and scale, and the diversification benefits associated with
its strong positions in many different markets. The rating also
reflects its management's track record and ability to execute a well-defined
and concise strategy, as well as its focus on preserving stable
cash flow generation and a strong credit profile through a balanced approach
to shareholder remuneration and bondholder protection. This includes
management's stated commitment to keep its reported net debt plus commitments
to EBITDA ratio within the 2x to 2.5x level in the medium term.
This ratio was at 2.55x as of September 2011, and it will
not fall within the target range when the 2011 year end results are published.
Telefónica continues to enjoy a vast international diversification
footprint, which significantly reduces its exposure to the Spanish
market. While Moody´s expects revenues in Spain to decline
by mid to high single digits this year, placing pressure on margins,
revenue growth in Europe and Latin America will partially mitigate the
negative effect.
From a liquidity risk management perspective, Moody's believes
that Telefónica's liquidity profile, although adequate,
is becoming slightly more constrained. As of September 2011,
the rating agency notes Telefónica's reported EUR7.1
billion debt maturing in 2012 and a similar amount for 2013. In
addition, the group will face significant capital expenditure requirements,
together with expected spectrum payments, share buybacks and cash
dividends in 2012. However, at the end of September 2011,
Telefónica had around EUR5.6 billion in cash and cash equivalents.
The group's external liquidity sources include EUR6.4 billion
worth of committed long-term bank facilities, which were
mostly unused as of January 2012. These facilities can be drawn
at any time and are not subject to material adverse change (MAC) clauses
or financial covenants.
WHAT COULD CHANGE THE RATING UP/DOWN
Downward pressure on the rating could arise if Telefónica were
to deviate from its financial ratio strengthening plan because of (i)
operating underperformance; (ii) weaker cash flow generation;
or (iii) the incurrence or assumption of further substantial debt in conjunction
with the pursuit of acquisitions or more aggressive shareholder distribution
policies. More specifically, the rating could come under
negative pressure if the group's credit protection metrics weaken,
such as an RCF/net adjusted debt ratio of less than 18% and a net
adjusted debt/EBITDA ratio that does not gradually improve towards 2.5x
within the next 12 to 18 months..
Upward pressure on the rating is unlikely at present given the negative
outlook. However, the outlook could revert back to stable
if there is a sustainable improvement in credit metrics, such as
an RCF/net adjusted debt ratio above 20% and a net adjusted debt/EBITDA
ratio below 2.5x. Although not currently expected in view
of today's action, Moody's could consider a rating upgrade
to A3 if Telefónica's debt protection ratios were to strengthen
significantly because of (i) improvements in its operational cash flows;
and (ii) further reductions in debt. The rating could come under
positive pressure if it became clear that the group would achieve sustainable
improvements in its debt protection ratios, such as an adjusted
RCF/net debt ratio sustainably above 25% and adjusted net debt/EBITDA
of approximately 2.0x.
PRINCIPAL METHODOLOGY
The principal methodology used in rating Telefonica was the Global Telecommunications
Industry Methodology published in December 2010. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".mx"
for Mexico. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Implementation Guidance
published in March 2011 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings".
Telefónica SA is the leading integrated telecommunications provider
in Spain. Telefónica is one of the world's leading telecommunications
carriers, with some 252.7 million customers worldwide (excluding
Spain). In Latin America, Telefónica provides services
to more than 194 million customers as of the end of September 2011,
being the leader operator in Brazil, Argentina, Chile and
Peru and has substantial operations in Colombia, Ecuador,
El Salvador, Guatemala, Mexico, Nicaragua, Panama,
Uruguay and Venezuela. In addition to its historic presence in
Latin America, Telefónica, also has a strong footprint
in the UK, Germany, Ireland and the Czech Republic.
As of September 2011, 72% of group revenues and 77%
of group EBITDA were generated outside Spain.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
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for general disclosure on potential conflicts of interests.
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for information on (A) MCO's major shareholders (above 5%) and
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for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
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Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Carlos Winzer
Senior Vice President
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody´s affirms ratings and changes rating outlook on Telefónica to negative
