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Rating Action:

Moody's changes outlook on Deutsche Telekom to stable from negative

15 Jun 2021

Madrid, June 15, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Baa1 senior unsecured rating and (P)Baa1 MTN program ratings of Deutsche Telekom AG (DT) and Deutsche Telekom International Finance B.V. Concurrently, Moody's has affirmed DT's Prime-2 (P-2) commercial paper rating. The outlook on all ratings has changed to stable from negative.

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

"The change in outlook to stable from negative reflects our expectation of progressive improvement in DT's operating performance in its core markets of Germany and the US, combined with management's commitment to progressively reduce leverage from 3.8x in 2021 to around 3x by 2024," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for DT.

RATINGS RATIONALE

DT's Baa1 rating reflects the company's large size and scale; its geographical diversification in Germany, the US, and Central and Eastern Europe; strong market positions across its geographical footprint despite sustained strong competition; high capital spending requirements, given the currently low fibre coverage in Germany; and the marginal impact of the coronavirus pandemic on the company's operating performance.

DT's rating also factors management's financial policy that includes a leverage comfort zone of net debt/EBITDA (as reported by the company) between 2.25x and 2.75x (equivalent to a Moody's adjusted net leverage of around 3.0x); its continued commitment towards the net leverage corridor and deleveraging after the consolidation of T-Mobile USA, Inc. (TMUS, Ba2 stable); the strong evolution of the company's US subsidiary, the group's key growth engine; and its excellent liquidity management, with a minimum two-year prefunding policy.

The stable outlook factors in the solid operating performance, expectation of improved cash flow generation and significant value creation of TMUS, that DT consolidates and controls with a 43% equity stake, but with an option to increase it to above 50%. Moody's factors in its assessment of DT the company's exposure to a Ba2-rated asset in the US, despite of the publicly stated limited recourse and self-funding strategy of TMUS.

While DT's leverage, on a Moody's adjusted net debt to EBITDA basis, is expected to reach 3.8x this year, exceeding the 3.0x threshold for the Baa1 rating category, the rating affirmation with a stable outlook factors in the expectation that the company will continue progressively deleveraging towards 3.0x by 2024, in line with management's comfort zone. Moody's also derives comfort from DT's strong cash flow generation capacity, with a retained cash flow to net debt ratio between 20% and 25% through 2024.

DT's leverage is higher than anticipated when Moody's changed the outlook on the Baa1 rating to negative in April 2018, mainly because of the C-band spectrum investment in US and new lease contract terms with American Towers. However, operating performance, particularly in the US has been stronger than anticipated, and execution of synergies has been faster.

Given Deutsche Telekom's status as a government-related issuer (GRI), the Baa1 rating benefits from a one-notch uplift stemming from Moody's expectation of support from the Government of Germany (Aaa stable).

LIQUIDITY

Deutsche Telekom's policy includes maintaining a liquidity reserve that covers debt maturities of at least 24 months. Over this period, Moody's expects that internal and external liquidity sources will enable the company to cover its debt maturities and other expected cash demands.

The company has cash and cash equivalents of €9 billion (including T-Mobile USA) and €12.6 billion of bilateral credit facilities (fully available) with no material adverse change clauses or financial covenants. The facility has an original maturity of 36 months, which can be extended (subject to an agreement with the respective counterparty) after each 12-month period by an additional 12 months. Additionally, T-Mobile USA has full availability under its $5.5 billion revolver.

RATIONALE FOR STABLE OUTLOOK

The stable rating outlook reflects that DT's rating is well positioned in the Baa1 rating category, because Moody's expects a gradual deleveraging towards management's comfort zone leverage of 2.25x to 2.75x by 2024 (equivalent to a Moody's adjusted leverage below 3x), combined with improving underlying operating performance at group level.

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

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 does not trend towards 3.0x, in line with management's comfort zone; 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 a reduction in the government's equity stake to below 20%, as Moody's may no longer apply the Government-related issuers (GRI) methodology to DT.

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 net 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

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

....Commercial Paper, Affirmed P-2

..Issuer: Deutsche Telekom International Finance B.V.

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

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

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

Outlook Actions:

..Issuer: Deutsche Telekom AG

....Outlook, Changed to Stable from Negative

..Issuer: Deutsche Telekom International Finance B.V.

....Outlook, Changed to Stable from Negative

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

Deutsche Telekom AG (Deutsche Telekom), domiciled in Bonn, Germany, is a leading provider of wireline and wireless services in the country. The key countries for the group are Germany (22.8% of net revenue in 2020) and the US (60.6%), where it operates in the mobile segment through T-Mobile USA.

In 2020, the company generated €101 billion in revenue and €40.4 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 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_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

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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