Madrid, April 13, 2012 -- Moody's Investors Service has today downgraded by one notch to Ba2 from
Ba1 the ratings of Portugal Telecom SGPS, SA. The affected
ratings are Portugal Telecom's corporate family rating (CFR),
the probability of default rating (PDR) and the senior unsecured long-term
debt ratings, as well as the ratings of Portugal Telecom's
fully owned subsidiary, PT International Finance B.V.
("PTIF"). The outlook remains negative.
RATINGS RATIONALE
The rating downgrade was prompted by Moody's concerns over the weakness
in the telecom operator's financial ratios and the expectation that
Portugal Telecom is unlikely to meet the financial ratio guidance set
for the previous rating level over the short to medium term. This
guidance included the expectation of debt reduction and operating performance
reflecting a positive trend towards adjusted Net Debt to EBITDA of 2.5x
and adjusted RCF to Net Debt improving towards the high twenties.
Although Portugal Telecom will maintain its strong domestic market position
in view of its enhanced networks, management strategy and business
model, Moody's believes that the required strengthening of
the company's financial ratios and improvement of its domestic and
international operations will not be sufficient to offset the increasing
business risk in Portugal. Portugal Telecom's rating is now
one notch above the rating of the Republic of Portugal (rated Ba3/negative).
Moody's decision was also driven by Portugal Telecom's challenges
in reversing the negative trends mainly driven by regulation, competition
and the macro economic crisis affecting its domestic business, including
the wholesale, enterprise, but more importantly, the
mobile personal segment, which experienced a revenue reduction of
11.2% in 2011, with customer revenues declining by
8.2%. Portugal Telecom faces substantial challenges
in view of regulatory and competitive pressures, subdued consumer
spending and the need to restructure its 23.2% owned Brazilian
subsidiary Oi, which is also facing operating challenges,
as underlined by the recent weak operating results. All of these
difficult operating conditions will put further pressure on the company's
ability to strengthen its financial metrics.
Prior to today's one-notch downgrade, Moody's
had already recognised that Portugal Telecom's rating was weakly
positioned in its previous rating category, with little margin for
operating under-performance. The rating downgrade is therefore
within Moody's previously published guidance for companies that
would normally be expected to have a rating close to that of the government
of the country in which they are located. At the same time,
the rating agency has determined that the Ba2 rating better reflects the
business risk that Portugal Telecom faces despite its (i) resilient,
albeit highly competitive, underlying business; (ii) leading
market position; (iii) international diversification; (iii)
management's track record in executing the company's strategy
under adverse circumstances; (iv) high-quality infrastructure,
which will support Portugal Telecom's revenues in the future and
help to partially mitigate the negative effects of the weak macro environment
in Portugal; and (v) the company's strong liquidity,
with pre-funded cash needs until the end of 2013.
From a liquidity risk management perspective, Moody's continues
to monitor Portugal Telecom's refinancing plans beyond 2013.
The telecoms operator has no need to issue more debt in the near term
and will only do so to take advantage of opportunities that may arise
in the market. In Moody's view, internal sources and
availability under long-term committed lines of credit should enable
Portugal Telecom to cover its debt maturities of approximately EUR1.6
billion over the next 18 months and other expected cash demands over this
period. As of December 2011, Portugal Telecom's cash in Portugal
amounted to EUR4.1 billion. In addition, the company
has EUR1 billion of undrawn committed commercial paper and syndicated
standby facilities.
The negative outlook reflects the negative pressures on the Portuguese
economy and its sovereign rating as well as Moody's expectation
that Portugal Telecom's financial ratios will remain relatively
constrained. In particular, the outlook reflects that the
telecoms operator (i) has limited headroom to absorb any increased competitive
and/or regulatory pressures in its domestic market, and (ii) faces
substantial challenges to restructure its Brazilian subsidiary and place
it on a sustainable growth path.
WHAT COULD MOVE THE RATING UP/DOWN
Moody's would consider further downgrading Portugal Telecom's
ratings if the rating agency were to become concerned about the company's
liquidity and medium-term funding needs, and/or if the company's
performance were to deteriorate beyond current expectations. Specifically,
a downgrade could occur, for example, if (i) Portugal Telecom
fails to reduce debt and its credit metrics deteriorate, such that
its adjusted net leverage trends towards 3.5x over the next couple
of years with no expected improvement; or (ii) if adjusted RCF/Net
Debt deteriorates towards 15%. Furthermore, Moody's
could consider downgrading Portugal Telecom's ratings in the event
of any further downgrade of Portugal's sovereign ratings.
In line with the negative outlook, Moody's does not expect
upward pressure on Portugal Telecom's ratings in the short to medium
term. However, the outlook could be stabilised if Moody's
were to perceive a material improvement in the overall macroeconomic and
market conditions in Portugal, including a reduction in pressure
on revenues, supported by improving consumer trends and a more benign
competitive environment. In addition, Moody's would
need to become comfortable with the company's liquidity risk beyond
2013. Upward pressure could develop if, in addition to the
conditions for a stable outlook, Portugal Telecom were to reduce
debt and improve its credit metrics and overall operating performance
on a sustainable basis, such that its adjusted net leverage trends
comfortably towards 2.5x and below.
The methodologies used in these ratings were Global Telecommunications
Industry published in December 2010, and Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.
Domiciled in Lisbon, Portugal Telecom is the leading telecommunications
operator in Portugal, servicing 4.7 million fixed lines,
which includes one million ADSL retail connections. In addition,
the operator had approximately 7.4 million mobile phone customers
in Portugal as of December 2011. Furthermore, Portugal Telecom
has operations in other countries, including Brazil, Cape
Verde, East Timor, Angola, Macau, Sao Tome and
Principe and Namibia. The company's annual revenues amounted to
EUR6.1 billion and reported EBITDA to EUR2.2 billion in
2011.
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
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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
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Carlos Winzer
Senior Vice President
Corporate Finance Group
Moody's Investors Service Espana, S.A.
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Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
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Releasing Office:
Moody's Investors Service Espana, S.A.
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Moody's downgrades Portugal Telecom's ratings to Ba2; Negative Outlook
