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Rating Action:

Moody's affirms BT's Baa2 rating and changes the outlook to negative

07 Feb 2020

London, 07 February 2020 -- Moody's Investors Service, ("Moody's") has today changed the outlook on British Telecommunications Plc (BT or the company) and EE Limited to negative from stable. Concurrently Moody's has affirmed British Telecommunications Plc's Baa2 senior unsecured and issuer ratings, the (P)Baa2 MTN programme and senior unsecured shelf rating as well as the Prime-2 short-term rating and EE Limited's Baa2 issuer rating.

RATINGS RATIONALE

"The change of outlook to negative reflects (1) Moody's forecasts for BT's revenues to remain under pressure in fiscal year (FY) ending 31 March 2020 and FY 2021 driven by intense competition and regulatory changes affecting the Consumer division and the structural decline of the company's Enterprise segment, (2) the rating agency's expectation for adjusted gross leverage (as adjusted by Moody's mainly for the pension deficit) to remain above the triggers set for a Baa2 rating at 3.5x over the next two years due to the aforementioned pressure on revenues and the upcoming spectrum auction, and (3) the execution risk related to a potential acceleration of the fibre rollout in terms of costs and capital expenditures although Moody's considers that increased investment is important to enhance the company's product offering and partly fend off increasing competition from alternative network providers", says Sebastien Cieniewski, Moody's lead analyst for BT.

These weaknesses are mitigated by (1) BT's strong business profile as the only integrated player in the UK telecom market which could allow the company to accelerate a convergent strategy in line with a number of European peers, (2) the options available to the company to fund an acceleration of fibre deployment, including a dividend cut and the issuance of hybrid instruments among others, in order to contain leverage.

In the first nine months of FY 2020 (nine-month period ending 31 December 2019), BT experienced a decrease in adjusted revenues and adjusted EBITDA (as reported by the company) of 2% and 3%, respectively. This decline was stronger in Q3 2020 only at 3% and 4%, respectively. Moody's expects revenues to remain under pressure in FY 2020 and FY 2021 declining by 1-2% year-on-year driven by continued decline in Consumer, Enterprise, and Global while Openreach should stabilize. The Consumer division will be negatively impacted by the intensity of competition in the UK telecom market as well as regulatory changes, including the so-called loyalty penalty which the rating agency expects to increase churn and maintain a deflationary trend on prices. The price pressure is partly offset by the first CPI-linked price rises on BT brand broadband products for contracts signed from January 2019 onwards. The Enterprise and Global divisions will continue to experience a structural decline owing to a decrease in voice revenues and legacy portfolios, respectively. In Moody's view, this pressure on revenues partly mitigated by cost savings should result in a moderate decline in EBITDA over the period.

The negative top line and EBITDA trend will maintain adjusted gross leverage at above the trigger of 3.5x set for a Baa2 rating. Leverage was 3.6x as of the last twelve months to 30 September 2019 and Moody's forecasts this ratio to remain at 3.6x to 3.7x in FY 2020 and FY 2021 (including the impact from the implementation of IFRS 16 estimated at 0.1-0.2x which has been looked through by Moody's). The lack of de-leveraging also reflects the company's weak free cash flow (FCF) generation and spend related to the upcoming spectrum auction. In a lower interest rate environment, Moody's expects that BT's pension deficit will remain high despite the company's contributions.

In January 2020, OFCOM published its Wholesale Fixed Telecoms Market Review. Moody's considers that the plan laid out by the regulator to be implemented from April 2021 after a period of consultation includes incentives for BT to accelerate the rollout of fibre-to-the-premise (FTTP). Previously the company stated that it could accelerate the fibre deployment to 15 million premises by mid-2020's if sufficient "enablers" were put in place with the government and OFCOM from a target of 4 million by March 2021. Such a large rollout implies some execution risk, including risk of labour shortage, and requires significant additional funding. The rating agency considers that the company will evaluate different options to fund this additional capital expenditures related to a potential accelerated rollout of fibre, including debt, a dividend cut, capital reprioritization, and hybrid securities issuance, among others.

Whilst environmental, social, and governance risks are not meaningful for this rating action, Moody's notes that BT does not have clearly defined metrics in terms of financial policy.

BT's liquidity is supported by cash and a current investment balance of GBP4.2 billion and an undrawn committed credit facility of GBP2.1 billion as of 30 September 2019. The bank facility matures in September 2021 and does not contain repeating material adverse change clauses or financial covenants.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the projected continued pressure on BT's top line over the next 18 to 24 months which should translate into a marginally declining to flat EBITDA and adjusted leverage remaining at above 3.5x. The outlook could be stabilized if (1) BT's EBITDA improves driven by improved top line trend and cost savings, (2) leverage decreases to below 3.5x, and (3) a potential acceleration of fibre rollout does not put additional pressure on free cash flow and leverage.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could arise if underlying operating performance and cash flow generation substantially improves with growing revenues and stronger key performance indicators (KPI) trends leading to a sustainable EBITDA growth trajectory, coupled with greater visibility in capital spending. Credit metrics that would support a rating upgrade include RCF/adjusted net debt sustainably above 22% and adjusted debt/EBITDA not exceeding 2.8x on a sustained basis.

Downward pressure on the rating could arise if operating performance remains weaker than expected, or the risks arising from the pension deficit significantly increases as a result of a widening in the deficit or actions that could be detrimental for bondholders, e.g. material subordination risks. Credit metrics that would support a rating downgrade include RCF/adjusted net debt sustainably falling below 18% and adjusted debt/EBITDA remaining above 3.5x on a sustained basis.

LIST OF AFFECTED RATINGS:

Affirmations:

..Issuer: British Telecommunications Plc

.... ST Issuer Rating, Affirmed P-2

.... LT Issuer Rating, Affirmed Baa2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

....Senior Unsecured Shelf, Affirmed (P)Baa2

..Issuer: EE Limited

.... Issuer Rating, Affirmed Baa2

Outlook Actions:

..Issuer: British Telecommunications Plc

....Outlook, Changed To Negative From Stable

..Issuer: EE Limited

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

BT Group Plc, which operates principally through its 100%-owned subsidiary British Telecommunications Plc, is the leading provider of local, long-distance and international telecommunications services in the UK, and is one of the world's leading providers of communications solutions and services, operating in more than 180 countries. Following the completion of the acquisition of EE Limited (EE) in January 2016, BT has also become one of the largest mobile network operators in the UK.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sebastien Cieniewski
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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