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Rating Action:

Moody's affirms DT's ratings; changes outlook to negative following TMUS/Sprint merger

30 Apr 2018

Madrid, April 30, 2018 -- Moody's Investors Service, ("Moody's") has today changed to negative from stable the outlook on the ratings of Deutsche Telekom AG (DT) and related subsidiaries, including the Baa1 senior unsecured rating and (P)Baa1 MTN program ratings. Concurrently, Moody's has affirmed these ratings and DT's Prime-2 (P-2) commercial paper rating.

A full list of affected ratings can be found at the end of this Press Release.

The action follows the announced merger of DT's US-subsidiary T-Mobile USA, Inc. ("TMUS") with Sprint Corporation ("Sprint") under the ownership of NewCo, through an all-stock transaction. The merger is subject to regulatory approval and is not expected to close before Q1 2019.

"Our decision to change the outlook on Deutsche Telekom's ratings to negative reflects the increased leverage of the combined entity, such that DT's consolidated group financial profile will exceed the financial ratio guidance for the current rating in 2019-21, leaving no headroom for underperformance or debt-financed acquisitions," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for DT. "However, the rating affirmation reflects the sound strategic logic of the merger, and the expected synergy benefits that the combination will generate," adds Mr. Winzer.

DT will own a 42% equity stake (Softbank 27%) in NewCo and will have a perpetual voting proxy over Softbank's shares in NewCo. DT will control and consolidate NewCo, but limit parental funding to an initial maximum of USD6.6 billion. Thereafter, NewCo will be financially independent and self-funded.

RATINGS RATIONALE

The change of outlook to negative reflects the fact that DT's consolidated net leverage will increase following the merger of TMUS and Sprint, peaking at 3.7x (Moody's adjusted net debt / EBITDA) post transaction in 2019, and remaining outside the ratio guidance for the Baa1 rating until 2021, when reported net leverage will return to management's comfort zone of reported net debt /EBITDA between 2x and 2.5x.

In addition, the outlook change reflects (1) the execution risk in the integration of TMUS and Sprint, (2) DT's increased exposure to a high yield asset (NewCo), and (3) the unclear shareholder structure beyond the lock-up period of 4 years.

Moody's decision to affirm the ratings acknowledges the strong industrial logic behind the transaction, which will strengthen NewCo's competitive position in the US wireless market. The combined entity will have greater scale, benefit from a significant amount of synergies, and will be able to better compete against market leaders Verizon and AT&T.

DT's US subsidiary has delivered an exceptional performance over the past few years. For example, in 2017, total revenues increased by 5.9%, while adjusted EBITDA margin improved to 26% (from 25% in 2016) despite high commercial costs, driven by strong customer acquisition numbers.

At this stage, considering that the merger makes strategic sense for DT's business in the US, the Baa1 rating reflects the stronger and improved positioning of DT in the US market, together with the reduced direct financial exposure. In addition, the operating benefits of this transaction outweigh the use of financial flexibility resulting from this merger.

While NewCo will be self-funding and ring-fenced from the DT Group, Moody's notes that potential future support from the parent cannot be fully ruled out, in case of operating underperformance of the US entity. This is because DT will fully consolidate NewCo, there is reputational risk, since NewCo will continue to use the T-Mobile brand, and DT may want to protect the value of its large equity investment in the business (currently of USD51 billion).

Despite the increase in the percentage of external debt at the US operating company level following this deal, Moody's has not notched down the ratings for structural subordination. This is because DT's geographically diversified business profile — with cash flow generation across a large number of operating subsidiaries in different geographic locations — helps to mitigate structural subordination risks. A large portion of cash flow generation is concentrated in the German business, while NewCo is not expected to be a material free cash flow contributor to the group through the forecasted period. In addition, Moody's has factored in management's determination to keep NewCo as a financially independent, self-funded entity with parental funding only provided to support NewCo at inception and for a limited amount.

DT's Baa1 ratings continue to reflect the company's: (1) large size and scale; (2) geographical diversification in Germany, the US, and Central and Eastern Europe; (3) strong market positioning in the countries where it operates; (4) status as a government-related issuer (GRI), as a result of which, the Baa1 rating benefits from a one-notch uplift derived from the Government of Germany 's (Aaa stable) support expectations; (5) public commitment to maintaining a conservative financial profile, balancing shareholder remuneration, investments and creditor protection; (6) financial policy inclusive of a reported net debt/EBITDA target range of 2.0x-2.5x; (7) continued high capital spending requirements; and (8) excellent liquidity management with over two years of pre-funding of debt maturities.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects that DT's ratings will be weakly positioned in the Baa1 rating category for a relatively long period of time (until 2021), with no headroom for deviation from Moody's expectations in terms of operating performance or debt-financed acquisitions.

WHAT COULD CHANGE THE RATING UP/DOWN

A rating downgrade could result if the company were to experience a deterioration in operating performance or embark on an aggressive expansion/acquisition programme, leading to higher financial, business and execution risk such that (1) the company's Moody's adjusted net debt/EBITDA ratio were to exceed 3.0x with no expectation of improvement; and (2) its adjusted RCF/net debt were to drop to (or below) 18% on a sustainable basis.

In addition, the ratings may be negatively affected by changes in the ratings of the supporting government, or by changes in the rating agency's assessment of default dependence and government support. Also, any reduction in government's equity stake below 20% would likely create negative rating pressure.

Moody's would consider upgrading DT's rating to A3 if the group strengthens its credit metrics on a sustainable basis, such that its retained cash flow/adjusted net debt ratio sustainably exceeds 25% and the group's adjusted total debt/EBITDA falls below 2.5x on a sustained basis, with an improvement in business risk and operating conditions.

LIST OF AFFECTED RATINGS

Affirmations:

Issuer: Deutsche Telekom AG

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Subordinate Medium-Term Note Program, Affirmed (P)Baa1

....Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Issuer: Deutsche Telekom International Finance B.V.

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Backed Subordinate Medium-Term Note Program, Affirmed (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

Issuer: Deutsche Telekom AG

....Outlook, Changed to Negative from Stable

Issuer: Deutsche Telekom International Finance B.V.

....Outlook, Changed to Negative from Stable

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Telecommunications Service Providers published in January 2017, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Deutsche Telekom AG, domiciled in Bonn, Germany, is a leading provider of wireline and wireless services in Germany. The key segments for the group are Germany (27.4% of 2017 net revenues) and the US (47.7%) where it operates in the mobile segment through T-Mobile US.

In the financial year ended December 2017, it generated approximately EUR74.9 billion in revenues and approximately EUR22.2 billion in EBITDA (adjusted for special factors). Deutsche Telekom is 31.9% owned by the German government (14.5% directly and 17.4% through Germany's state-owned development bank KfW).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 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.

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
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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