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Rating Action:

Moody's changes outlook on Telecom Italia's Ba1 rating to stable from negative

Global Credit Research - 09 May 2017

Madrid, May 09, 2017 -- Moody's Investors Service has today changed to stable from negative the outlook on leading Italian integrated telecommunications provider Telecom Italia S.p.A.'s (Telecom Italia) Ba1 corporate family rating (CFR), the ratings of all debts issued (or guaranteed) by the company, and all supported debts within its family of issuers, including the Ba1 senior unsecured ratings and (P)Ba1 MTN program ratings. Concurrently, Moody's has affirmed all these ratings as well as the company's Ba1-PD probability of default rating (PDR).

"The stabilisation of the outlook on Telecom Italia's ratings reflects our expectations that the company's management team will continue to build on recent financial and operating performance improvements to strengthen cash flows and boost creditworthiness into 2018," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telecom Italia. "That said, the company's high cash needs and rising competition could slow the speed with which it reduces leverage."

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

The stabilisation of the outlook on Telecom Italia's ratings and parallel affirmations reflect Moody's expectation that following the improved financial and operating performance in 2016 and Q1 2017, management will continue to take decisive measures to improve cash flow and to strengthen the company's financial ratios through 2017 and 2018. As a result, the rating agency expects that Telecom Italia will achieve a Moody's-adjusted net debt/EBITDA ratio in the 3.1x-3.3x range by 2018 compared with 3.4x achieved in 2016. This is consistent with the rating agency's guidance for the current rating.

Moody's stated that there are clear signs of operating improvements in most segments, such as domestic mobile, while cost efficiencies continue to be implemented to improve EBITDA. The agency added that the past declining revenue trend at group level has bottomed out and it expects revenue stability through 2019. Moody's also said that the pace of debt reduction remains a challenge for management as capex and spectrum needs remain high in 2017.

Moody's also expressed concern in relation to the competitive challenges in Italy and the impact on Telecom Italia resulting from the possible aggressive commercial offer from France's Iliad Group (Iliad, unrated), which is expected to enter the market towards the end of this year or early next year. Although Telecom Italia is implementing a number of strategic initiatives such as the creation of a second brand in Italy, it remains to be seen how disruptive the new entrant will be and what effect Iliad's commercial offer will have.

Moody's expects that operating conditions in Italy will remain challenging for some time, and recognises the limited options that Telecom Italia has to strengthen its balance sheet other than organically. Telecom Italia plans to de-lever organically through a combination of an effective restructuring of its domestic and Brazilian operations and a more efficient capex plan. Some of these measures have already been implemented and its results show in the company's cash flow.

Moody's considers that Telecom Italia's Ba1 CFR is supported by the company's (1) scale and position as the incumbent service provider in Italy; (2) integrated telecoms business model, with strong market positions in both the fixed and mobile segments; (3) geographical diversification in Brazil; (4) continued commitment to deleveraging towards 2.7x Net debt/EBITDA by 2018 (as reported by the company, which is equivalent to Moody's net adjusted leverage of approximately 3.1x); (5) best in class operating margins and ongoing opex reductions; and (6) strong liquidity. However, uncertainties remain regarding (1) the pace of execution of the company's strategy; (2) ENEL S.p.A.'s (Baa2 stable) fibre investment initiatives, which aim to create a nationwide alternative infrastructure-based competitor and could dent Telecom Italia's revenues in the long-term; and (3) the entry of Iliad in the Italian telecom market.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Telecom Italia has reversed a declining trend in revenues at group level and will report stable revenues in coming years, despite the operating challenges both in Italy and Brazil. Moody's takes into account the new CEO's determination and ability to execute a very demanding strategy pursuing greater operating efficiencies, as already delivered in 2016 and Q1 2017, to underpin future EBITDA growth.

Moody's expects that domestic mobile revenues will continue to grow, although not fully offsetting fixed voice revenue pressures. The rating agency also expects that Telecom Italia will achieve a Moody's-adjusted net debt/EBITDA ratio in the 3.1x-3.3x range by 2018.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could consider a rating upgrade if Telecom Italia's operating performance were to materially improve compared to Moody's expectations, such that the company's net adjusted debt/EBITDA falls comfortably below 3.0x on a sustainable basis.

Negative pressure could be exerted on Telecom Italia's ratings in the case of: (1) a material decline in operating performance relative to FY2016 levels and expectations, and (2) a failure to continue along a deleveraging trajectory particularly if the company's net adjusted debt/EBITDA ratio were to increase above 3.5x on a sustainable basis with no prospect of improvement.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Telecom Italia S.p.A.

....LT Corporate Family Rating, Affirmed Ba1

....Probability of Default Rating, Affirmed Ba1-PD

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba1

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba1

....Senior Unsecured Bank Credit Facility, Affirmed Ba1

....Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

..Issuer: Olivetti Finance N.V.

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

..Issuer: Telecom Italia Capital S.A.

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

..Issuer: Telecom Italia Finance, S.A.

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

Outlook Actions:

..Issuer: Telecom Italia S.p.A.

....Outlook, Changed To Stable From Negative

..Issuer: Olivetti Finance N.V.

....Outlook, Changed To Stable From Negative

..Issuer: Telecom Italia Capital S.A.

....Outlook, Changed To Stable From Negative

..Issuer: Telecom Italia Finance, S.A.

....Outlook, Changed To Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Telecom Italia Group (consisting of Telecom Italia S.p.A. and its subsidiaries) is the leading integrated telecommunications provider in Italy, delivering a full range of services and products, including telephony, data exchange, interactive content and information and communications technology solutions. In addition, the group is one of the telecoms players in the Brazilian mobile market, operating through its subsidiary Telecom Italia Mobile (TIM) Brazil. Vivendi SA (Baa2 stable) is the main shareholder with a 23.9% share (direct and indirect shareholding) in Telecom Italia. For 2016, Telecom Italia reported EUR19.0 billion in revenue and EUR8.0 billion in organic EBITDA.

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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