Madrid, April 20, 2017 -- Moody's Investors Service has affirmed the Baa1 senior unsecured ratings
and (P)Baa1 MTN programme ratings of Deutsche Telekom AG (DT) and related
subsidiaries. Concurrently, Moody's has also affirmed
the Prime-2 short-term debt rating of DT. DT is Germany's
leading provider of wireline and wireless services. The rating
action follows the $7.99 billion purchase by DT's
US subsidiary T-Mobile USA, Inc. (TMUS, Ba3
stable) of a significant portion (45%) of low-band 600 MHz
spectrum at the auction carried by the Federal Communications Commission.
TMUS is 65% owned by DT.
The outlook on all ratings remains stable.
"The ratings affirmation reflects the strengthening of T-Mobile's
competitive position in the US wireless market following the purchase
of these strategic spectrum frequencies. DT's consolidated
financial profile following this purchase will remain commensurate with
the current rating owing to its financial flexibility, its expected
future cash flow generation capacity and the fact that the investment
has been prefunded," says Carlos Winzer, a Moody's
Senior Vice President and lead analyst for DT.
A full list of affected ratings can be found at the end of this Press
Release.
RATINGS RATIONALE
The ratings affirmation reflects the fact that the purchase, which
is a sizeable cash investment for DT and is TMUS's largest ever
investment, will not significantly impact DT's consolidated
financial profile. Moody's expects DT's net debt to
EBITDA (Moody's adjusted) to fall to around 3x by 2018 from around
3.2x in 2017 post-spectrum payment.
In addition, the operating benefits of this transaction outweigh
the use of financial flexibility resulting from this purchase.
TMUS's purchase of the new low band spectrum will strengthen its
competitive position in the US wireless market giving it greater quality
differentiation capacity, wider geographical footprint, greater
in-building coverage, faster speed and network capacity.
Low-band spectrum substantially improves in-building coverage
and also travels greater distances than mid-band and high-band
spectrum.
TMUS will have significantly more low-band spectrum per customer
than any other US wireless provider. This additional low-band
spectrum means that the company will be able to expand its LTE network
to compete across the US, strengthen existing LTE coverage and increase
capacity to meet customers' growing demand for mobile data.
TMUS is now more likely to accommodate unlimited data plans with this
additional spectrum and can continue to aggressively compete on price.
Although TMUS has a good track record of deploying network technologies
fast and the company expects leading smartphone makers to begin delivering
600 MHz compatible phones as soon as this year, Moody's does
not expect the benefits of the new spectrum acquired to start bearing
fruit until late 2018 or 2019, when it will drive handset revenues
higher.
Deutsche Telekom is 32% owned by the German government (14.5%
directly and 17.5% through Germany's state-owned
development bank KfW) and therefore enjoys the status of a government-related
issuer (GRI). The Baa1 rating benefits from a one-notch
uplift derived from the government's support expectations.
The Baa1 senior unsecured rating reflects the combination of the following
GRI inputs: (1) the baseline credit assessment of baa2, which
represents our view of the company's standalone creditworthiness;
(2) the Aaa local-currency issuer rating of the German government;
(3) the low default dependence between DT and the government; and
(4) the moderate level of government support for DT.
DT's baa2 baseline credit assessment primarily reflects the company's
(1) large size and scale; (2) geographically diversified operating
footprint in Europe and the US; (3) strong market positions,
despite continued intense competition in Germany, Europe and the
US; (4) excellent liquidity management with over two years of pre-funding;
and (5) public commitment to maintaining a conservative financial profile,
balancing shareholder remuneration, investments and creditor protection.
DT's financial policy includes a reported net debt/EBITDA comfort
zone of 2.0x-2.5x which equates to a maximum Moody's
adjusted net debt leverage of 3.4x. The company has operated
in the medium to upper limit of the range for some time, although
Moody's expects gradual de-leveraging to take place over
the medium term.
Moody's expects the group's revenues to increase in 2017 by around
3%, while its adjusted EBITDA margin will improve to around
33%. Furthermore, the rating agency expects stable
or slightly improving cash flow ratios, with adjusted Retained Cash
Flow (RCF)/net debt at around 23%-25%. Capex
and debt levels will peak over 2017-2018 with capex/revenues around
20%.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the ratings reflects Moody's expectation that
DT will benefit from improving operating cash flow, while the company
will continue to target a mid-point of the 2.0x-2.5x
net debt/EBITDA comfort zone (as reported by the company), which
is equivalent to maximum Moody's-adjusted net debt/EBITDA of around
3.4x. The stable outlook also assumes that DT will maintain
a RCF/adjusted net debt ratio of above 20%.
WHAT COULD CHANGE THE RATING UP/DOWN
A rating downgrade could result if, inter alia, 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, Remains Stable
..Issuer: Deutsche Telekom International Finance B.V.
....Outlook, Remains Stable
The principal methodology used in these ratings was Telecommunications
Service Providers published in January 2017. Other methodologies
used include the Government-Related Issuers methodology published
in October 2014. 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 (28.3% of 2016
net revenues) and the US (46.2%) where it operates in the
mobile segment through TMUS. Deutsche Telekom also has strong market
positions in Greece, Croatia, Hungary and Macedonia,
with leading positions in both the fixed-line and mobile segments.
In Romania, Slovakia and Montenegro, Deutsche Telekom leads
the fixed-line markets and has a strong position in the mobile
segment. In Czech Republic and Poland, the company is one
of the three leading mobile operators, and a strong market player
in the fixed-line business. In the financial year ended
December 2016, it generated approximately EUR73 billion in revenues
and approximately EUR21.4 billion in EBITDA (adjusted for special
factors). Deutsche Telekom is 32% owned by the German government
(14.5% directly and 17.5% 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
SUBSCRIBERS: 44 20 7772 5454
Ivan Palacios
Associate Managing Director
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
