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Rating Action:

Moody's affirms Swisscom's A2 ratings; stable outlook

26 Apr 2019

London, 26 April 2019 -- Moody's Investors Service ("Moody's"), has today affirmed the A2 issuer and senior unsecured ratings of Swisscom AG ("Swisscom"). The outlook is stable.

"The ratings affirmation reflects Swisscom's solid credit fundamentals and a two-notch uplift due to implicit support from the Government of Switzerland (Aaa stable). We expect Swisscom to sustain its leading market share in Switzerland supported by its strong network quality," says Sebastien Cieniewski, a Moody's Vice President - Senior Credit Officer and lead analyst for Swisscom.

"We expect Swisscom to maintain a strong financial profile given its public commitment to a leverage target ratio (reported net debt/EBITDA) of around 1.9x. In addition, we expect the company's underlying EBITDA to remain largely flat in 2019 and modestly grow in the next two years driven by strong growth from Fastweb and cost savings in Switzerland, offsetting declining underlying revenues in Switzerland given intensified competition," adds Mr. Cieniewski.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Swisscom's A2 rating reflects (1) the quality of its management team and its determination to execute its strategy, as demonstrated by strong market shares in all segments; (2) the company's very high-quality network, supported by significant investments; and, (3) its strong financial profile and Moody's expectation that the group will continue to adhere to its public commitment of a leverage target ratio (reported net debt/EBITDA) of around 1.9x (excluding IFRS 16 impact), which would be equivalent to a Moodys-adjusted leverage of around 2.3x-2.4x.

However, the rating also reflects: (1) increasing competition and high penetration in the company's domestic market, which will continue to weigh on its underlying revenue growth prospects; and, (2) Swisscom's medium size and modest international diversification, limited to the Italian market.

Swisscom qualifies as a government-related issuer (GRI) because it is 51% government owned. The A2 rating benefits from a two-notch uplift because of implicit government support, and reflects the combination of the following GRI inputs: (1) a Baseline Credit Assessment (BCA) of baa1; (2) the Aaa (stable) local-currency rating of the Swiss government; (3) the low default dependence between Swisscom and the government; and (4) the moderate support expectation from the government.

Swisscom has one of the strongest market shares among European incumbents in its domestic market. The company preserved its market share in mobile and broadband at around 59% and 53%, respectively, in 2018, despite increased competition. It has gained market share in TV to 35% in December 2018, up from 33% in 2017.

Moody's believes the company's high-quality network represents a key competitive advantage, enabling it to expand the range of its products and services. As of December 2018, the company had connected 64% of the Swiss population with speeds above 80 megabits per second (Mbps) and around a third with speeds over 200 Mbps. By 2021, the company intends to connect 90% and 75% of the population to broadband speeds above 80 Mbps and 200 Mbps, respectively. The rating agency expects capital spending to remain high at around 20% of sales in 2019 with some modest reductions in the next two years.

Moody's expects intensified competition in Switzerland to weigh on the company's revenue growth prospects in 2019, but improve thereafter driven by fading pressures in fixed voice, up-selling efforts and a growing contribution in ICT partially offsetting fierce competitive pressure on enterprise connectivity revenues. Continued strong growth in its Italian operations, Fastweb, should support a stabilisation in consolidated revenues in 2020 and 2021.

Moody's expects EBITDA to remain broadly flat over the next 18-24 months as cost savings will partially offset the domestic top-line declines. Swisscom plans to reduce its cost base annually by CHF100 million over 2019-2020 thanks to continued optimisation of its workforce, digitalization and automation. In addition, if the proposed deal between Sunrise and UPC Switzerland goes ahead, Swisscom's EBITDA will be marginally affected due to the expected decline in wholesale revenues.

The rating agency does not anticipate that consolidation in Switzerland between Sunrise and UPC will alleviate competitive pressures in Switzerland because Salt will remain the third mobile challenger with long-term access to fibre-to-the-home provided by utilities and Swisscom.

Moody's expects the company to continue generating limited free cash flow owing to its high dividend payout. The rating agency also expects an improvement in adjusted retained cash flow (RCF)/Debt towards 28% over the next two years as the company will benefit from lower interest payments going forward. The rating agency also expects Swisscom's adjusted leverage to stay at around 2.3x-2.5x, which positions well the company in its rating category.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Swisscom's operational strength, implicit support from the Swiss government and Moody's expectation that the group will maintain a prudent financial policy.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure could develop on the BCA in the event of a stronger-than-expected improvement in Swisscom's underlying operating performance on a sustainable basis. Assuming the other government-related issuer (GRI) factors remain constant, upward pressure could be exerted on the rating if the company's RCF/adjusted debt exceeds 35% and its adjusted debt/EBITDA declines below 2.0x.

Negative pressure could be exerted on the BCA if the company's RCF/adjusted debt declines sustainably below 25% and its adjusted debt/EBITDA increases to 3.0x, with no expectation of improvement.

Swisscom's rating could be affected by changes to the Swiss government's rating or by changes in Moody's assessment of default dependence and support. For example, if the government was to reduce its stake in Swisscom to less than 20%, Moody's would most likely no longer consider the company a GRI and would likely implement a two-notch downgrade.

Downward rating pressure could also develop if there was a reduction in state support or if the government was to distance itself from the company even before the share disposal.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Swisscom AG

.... Issuer Rating, Affirmed A2

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

Outlook Actions:

..Issuer: Swisscom AG

....Outlook, Remains Stable

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Telecommunications Service Providers published in January 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

COMPANY PROFILE

Swisscom AG is a medium-sized telecommunications operator, providing mobile, broadband, TV and fixed-line telephony services. Swisscom's activities are concentrated in Switzerland, while the company's international diversification is limited to Italy via Fastweb.

As of December 2018, the company served in the domestic market 6.6 million mobile customers, 1.8 million fixed voice lines and 2.0 million broadband connections. Through Fastweb the company had 2.5 million and 1.4 million customers in the broadband and mobile segments, respectively. In 2018, the company generated revenue of CHF11.7 billion and EBITDA of CHF4.2 billion.

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.

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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