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Announcement:

Moody's changes outlook on Telecom Italia's Baa2 ratings to negative from stable

07 Sep 2011

Madrid, September 07, 2011 -- Moody's Investors Service has today changed to negative from stable the outlook on the Baa2 senior unsecured rating and issuer rating of Telecom Italia S.p.A ("TI"). Concurrently, Moody's has also changed to negative from stable the outlook for the ratings of all TI's guaranteed subsidiaries.

Moody's maintains the following ratings on Telecom Italia S.p.A. and it's following affiliates:

Senior Unsecured (domestic currency) and (foreign currency) ratings of Baa2

Senior Unsecured Bank Credit Facility (domestic currency) ratings of Baa2

Senior Unsecured MTN (domestic currency) ratings of (P)Baa2

Sogerim

BACKED Senior Unsecured MTN (foreign currency) ratings of (P)Baa2

BACKED Senior Unsecured Shelf (foreign currency) ratings of (P)Baa2

Telecom Italia Capital S.A.

BACKED Senior Unsecured (foreign currency) ratings of Baa2

BACKED Senior Unsecured MTN (foreign currency) ratings of (P)Baa2

BACKED Senior Unsecured Shelf (foreign currency) ratings of (P)Baa2

Olivetti Finance N.V.

BACKED Senior Unsecured (domestic and foreign currency) ratings of Baa2

Telecom Italia Finance, S.A.

BACKED Senior Unsecured (domestic currency) ratings of Baa2

BACKED Senior Unsecured MTN (domestic currency) ratings of (P)Baa2

RATINGS RATIONALE

"The change in outlook factors in uncertainties surrounding TI's ability to achieve its publicly stated financial targets for deleveraging in an increasingly competitive Italian telecoms market," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for TI. "Challenging operating conditions may be exacerbated by negative effects on consumer spending from slow economic growth and government austerity measures," Mr Winzer explains. "As a result, we expect continued pressure on TI's revenues, which will challenge the company's ability to reduce its debt and improve its credit metrics this year."

Although Moody's expects TI's performance to improve in the second half of the year, following weakness in the first half, the outlook change considers TI's difficulties in delivering organic growth to sustain cash flow and contribute to its deleveraging plan. In order to offset pressures on its domestic operations, Moody's expects TI to continue to cut operating expenditures, and enhance both its fixed and mobile service offerings through competitive pricing and bundled offers. The company will also continue to benefit from its growing business in Brazil and Argentina.

Moody's notes that although Telecom Argentina is fully accounted for under the global consolidation method, TI has an economic interest of only 21%. While this appears to be sufficient for TI to effectively control Telecom Argentina, Moody's expects no cash up-streaming until 2013 at the earliest.

Given the challenging operating conditions in Italy, TI's management may find it difficult to meet its commitments for deleveraging. Financial metrics are marginally positioned for the rating and ratings could come under pressure if the company is not able to achieve the planned improvements in its financial profile.

More specifically, Moody's expects TI to comply with management's guidance to the market, which for 2011 includes broadly stable, consolidated organic group revenues of approximately EUR29.5 billion and reported EBITDA of EUR12.5 billion. Moody's also expects management to maintain the reported group EBITDA margin above 40% and to use free cash flow (FCF) to further reduce its debt at a rate of approximately EUR2 billion per year, as a priority over shareholder remuneration. This is in line with the company's continued commitment to debt reductions and financial discipline. In fact, management has recently publicly stated that TI is on track to achieve cumulative reported FCF before dividends of approximately EUR12 billion in 2011-13, which will enable the company to reduce its reported net debt to around EUR25 billion by 2013 (and will represent a debt reduction of EUR6.5 billion). This includes (i) TI's recent investment of EUR700 million in the Brazilian fibre-optic company Aes Atimus; and (ii) the company's payment of EUR4 billion in cumulative dividends through 2013, which represents a 15% annual increase. Management projections do not include cash payments for spectrum auctions, although Moody's expects these not to exceed EUR1 billion.

The negative outlook reflects Moody's view that TI is facing stronger headwinds in its efforts to improve its financial ratios, such as adjusted net debt/EBITDA to materially below 3.0x and retained cash flow (RCF)/adjusted net debt to above 20%. TI is now more weakly positioned in the Baa2 rating category as there is less headroom for the company to deliver on those metrics, which are commensurate with Moody's expectations for the current Baa2 rating for TI. Moreover, downward pressure on the rating could result if TI were to deviate from management's plan for 2011 and beyond. This could be reflected by signs that the company were failing to prevent a deterioration in its domestic revenue. The negative outlook reflects that there are as yet no clear signals of such an improvement in TI's domestic market, despite the company stating that it expects a recovery in the third quarter of 2011.

Although TI continues to make a significant effort to cut its operating costs in Italy, the company's domestic revenues continue to decline (single digits) and Moody's remains uncertain as to when they will stabilise. TI's international diversification into Latam (67% ownership of TIM Brazil and 21% ownership of Telecom Argentina) has contributed to the company's revenue growth, but might be not enough to offset the deterioration in its cash flow generation prospects in Italy.

In the mobile segment, competition remains fierce, with Vodafone holding a similar market share as TI (34%), followed by Wind (22%) and Hutchinson (10%). Migration into voice bundles is boosting traffic but elasticity remains negative, despite the increase in traffic volumes. Price per minute continued to fall by approximately 20% per annum as a consequence of the 2010 price reductions. Moody's expects prices to gradually stabilise in the second half of 2011. The fact that TI avoids mobile handset subsidies and has resisted the industry's attempts to reduce its prices has helped it to maintain high margins.

Moody's recognises that TI enjoys the highest margins in the rated telecoms sector and considers that this, combined with its strong market positions and management's discipline, will enable the company to fulfil its financial strategy. Opex reductions will continue to be supported by further employee layoffs, but Moody's recognises that related costs such as marketing and general administration are more difficult to cut.

In Moody's view, TI's liquidity profile is more than sufficient to cover its near-term debt maturities and other cash demands, including capex and dividend payments. As of June 2011, the group had around EUR4 billion in cash and cash equivalents and marketable securities. TI's external liquidity sources are robust, with EUR7.8 billion in unused committed credit lines. The credit lines are not subject to material adverse change or financial covenants. Moody's expects TI to maintain a liquidity backstop (cash position plus unused committed bank lines) that will cover at least 12-18 months of debt maturities. There is no significant structural subordination of creditors at the TI level, given TI's policy of avoiding external debt at the operating subsidiary level.

Although not currently expected in view of today's action, Moody's could consider a rating upgrade to Baa1 if TI's debt protection ratios were to strengthen significantly as a result of improvements in its operational cash flows and further reduction in debt. The rating could come under positive pressure if it became clear that the group would achieve sustainable improvements in its debt protection ratios, such as an adjusted RCF /net debt ratio of above 25% and adjusted net debt/EBITDA of approximately 2.0x.

Negative pressure on the rating could arise if TI were to deviate from its debt reduction plan or step up its investment strategy or other uses of cash, causing a deviation from management's committed financial discipline and business plan. Resulting metrics would include an RCF/net adjusted debt ratio of less than 20% and a net adjusted debt/EBITDA ratio that does not gradually improve towards 2.5x in the medium term.

PRINCIPAL METHODOLOGY

The principal methodology used in rating Telecom Italia S.p.A was the Global Telecommunications Industry Methodology, published December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Telecom Italia Group ("TI", 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. It is also the operator of one of the three national TV networks. The group currently supplies 15 million fixed-network physical access telephone lines and 31.2 million mobile telephone lines in Italy, as well as almost 9.1 million broadband connections in the country as of June 2011. The group is also one of the top players in Argentina, with 17.4 mobile customers and 4 million fixed voice accesses, and in the Brazilian mobile market, operating through its subsidiary, Telecom Italia Mobile (TIM) Brasil, which had 55.5 million mobile telephone lines as of June 2011.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

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

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the credit rating action. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Madrid
Carlos Winzer
Senior Vice President
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's changes outlook on Telecom Italia's Baa2 ratings to negative from stable
No Related Data.
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