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Rating Action:

Moody's affirms Telenor's A3 rating; changes outlook to negative

16 Jul 2021

London, 16 July 2021 -- Moody's Investors Service ("Moody's") has today affirmed Telenor ASA's (Telenor or the company) A3 senior unsecured Euro Medium Term Notes ratings, (P)A3 rating on the company's Euro Medium-Term Note Program, and Prime-2 (P-2) short term Commercial Paper ratings. The outlook on the ratings has been changed to negative from stable.

RATINGS RATIONALE

"The change of outlook to negative mainly reflects (1) Moody's expectation that Telenor's adjusted gross leverage (as adjusted by the rating agency) which stood at 2.7x as of the last twelve months (LTM) period to 31 March 2021 is likely to increase to around 3.0x in 2021 and 2022 pro forma for the deconsolidation of Telenor's operations in Myanmar and Malaysia, (2) the negative impact from COVID-19 on the company's operations in particular in Asia where Moody's considers that there is a greater uncertainty related to the pace of recovery, and (3) the overall increased level of competition across Telenor's operations over the last two years as demonstrated by increased pressure on average revenue per user (ARPU) or on the number of subscribers", says Sebastien Cieniewski, Moody's lead analyst for Telenor.

However, these challenges are mitigated by (1) the relatively higher resilience and visibility of Telenor's Scandinavian operations mainly driven by sustained good performance in Norway and Finland and visible improvement over the last three quarters in Denmark which had experienced a prolonged period of decline, (2) the partial de-risking of the business through the exit from Myanmar, (3) the company's strong cash flow generation before shareholder distributions with retained cash flow (RCF)-to-debt projected by Moody's at around 17% in 2021 and 2022 and a positive free cash flow (FCF) generation (post dividends and capital expenditures) driven by the company's high level of profitability and relatively moderate capital expenditures requirements, and (4) the good liquidity supported by the company's large cash balance and full availability under its EUR2.0 billion committed revolving credit facility.

Telenor experienced a 2.3% decline in total organic revenue and a 1.9% decline in organic subscription and traffic revenue in 2020 compared to prior year negatively impacted by COVID-19 in particular in the company's Asian operations, including Thailand and Malaysia where roaming revenues suffered from the lack of tourists. Although the company continued to experience a decline in subscription and traffic revenue in Q1 2021 compared to the same period last year (2.9% decline excluding Myanmar), Moody's expects subscription and traffic revenue and EBITDA to be relatively flat in 2021 on an organic basis compared to prior year. Telenor should face an easier comparable in future quarters due to the annualization of the impact of COVID-19, including on roaming revenues, and the company continues to deliver on its modernization plan by generating operating expense savings. Moody's projects a return to more visible revenue and EBITDA growth only from 2022.

Telenor's Moody's adjusted gross leverage stood at 2.7x as of the LTM period to Q1 2021, slightly below the 2.8x at the end of 2020. Moody's projects an increase in the company's adjusted gross leverage to around 3.0x in 2021 and 2022. The increase in leverage in 2021 will be driven by the negative impact on EBITDA from the appreciation of the NOK and the classification of the company's operations in Myanmar as assets held for sale. On 8 July 2021, Telenor announced that it entered into an agreement to sell its Myanmar operations to M1 Group for a total consideration of USD105 million (approximately NOK900 million), of which USD55 million (approximately NOK470 million) is a deferred payment over five years.

Despite a moderate recovery in EBITDA projected for 2022, Moody's projects leverage to be further negatively impacted by the deconsolidation of Digi, its 49%-owned fully consolidated operations in Malaysia, following the expected closing of the merger with Celcom Axiata Bhd (a subsidiary of Axiata Group Berhad, Baa2 stable) in Q2 2022. Axiata Group Berhad and Telenor will be equal partners with a 33.1% ownership stake each in the merged entity which will continue to be listed on Bursa Malaysia Securities Berhad. The deconsolidation of both Telenor's Myanmar and Malaysian operations has a negative impact on the company's Moody's adjusted gross leverage of c.0.3x (or 0.2x including dividends to be received from Celcom Digi going forward as estimated by the rating agency) due to the subsidiaries' relatively lower leverage compared to the average of the group. However at the same time the merger of Celcom Digi will reinforce their business profile and potentially improve the competitive environment in the country where ARPU has suffered from the entry of new operators.

As part of this rating action, Moody's decided to change the leverage and cash flow rating triggers for the rating category to reflect the relatively higher negative impact on leverage from the implementation of IFRS 16 relative to peers and the decrease in earnings generated from emerging Asia following the disposal of the Myanmar operations. The Moody's adjusted gross leverage trigger has been changed to a range of between 2.25x to 2.75x from 2.0x to 2.5x while the Moody's adjusted retained cash flow (RCF)/debt trigger has been changed to between 20% to 30% from 20% to high 30's in percentage terms.

Telenor's liquidity is good supported by the company's cash and cash equivalents of NOK22.8 billion as of March 2021 and full availability under its EUR2.0 billion committed revolving credit facility maturing in April 2024, with options for extension until April 2025 on certain terms. Additionally Moody's projects that the company will generate strong cash flow before dividend payments and a positive FCF after dividends and capital expenditures (excluding licenses and spectrum) assuming the latter will account for around 15% to 16% of revenues over the next three years.

Telenor qualifies as a government-related issuer (GRI) because it is 54% government owned. The baa1 rating benefits from a one-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 Norwegian government, (3) the low default dependence between Telenor and the government, and (4) the low support expectation from the government.

ESG CONSIDERATIONS

Moody's considers that social considerations are a key driver for the rating action. While the rating agency positively views Telenor's exposure to a growing population and relatively underpenetrated markets for mobile data consumption through its presence in developed and emerging Asian countries, the rating action is partly driven by political unrest in Myanmar. Following the military coup in Myanmar, the authorities ordered a nationwide mobile data network shutdown from 15 March 2021. This order, alongside the worsening economic and business environment, had a negative impact on Telenor and this eventually led to the company deciding to write off completely its Myanmar operations and sell the business.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects Moody's expectation that Telenor's metrics will remain outside of the updated leverage and cash flow target ranges in 2021 and 2022 with a potential path to improvement from 2023 as the company returns to a more meaningful EBITDA growth. However the pace of this improvement remains uncertain and will partly depend on the phasing off of the impact of COVID-19 and the financial policy of the group going forward, including through its M&A strategy.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's would consider upgrading Telenor's rating if the group's credit metrics improve such that its (1) adjusted RCF/debt increases towards 30% on a sustained basis, and (2) adjusted debt/EBITDA drops consistently and comfortably below 2.25x. In addition to the factors listed above affecting Telenor's Baseline Credit Assessment (BCA), the group's rating could be affected by changes in the rating of the supporting government or changes in our assessment of default dependence and government support.

Negative rating pressure could develop if Telenor's (1) adjusted RCF/debt were to be maintained at well below 20% for a sustained period, (2) adjusted debt/EBITDA were to be maintained at above 2.75x, or (3) the company were to adopt a more aggressive financial policy which would lead to a sustained negative FCF.

PRINCIPAL METHODOLOGY

The methodologies used in these ratings were Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

COMPANY PROFILE

Telenor is the incumbent integrated telecommunications provider in Norway. The company delivers a full range of services and products, including mobile and fixed-line telephony, broadband and datacom services for residential and business customers, and a broad range of wholesale services. In addition, the company is one of the leading international providers of mobile services, with around 182 million mobile subscribers worldwide as of December 2020. The company's activities outside its home market include mobile and fixed operations in Sweden and Denmark, and mobile operations in Thailand (dtac), Malaysia (Digi), Bangladesh (Grameenphone), Pakistan, Myanmar, and Finland.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Mario Santangelo
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

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