Madrid, May 12, 2016 -- Moody's Investors Service (Moody's) has today changed to negative
from stable the outlook on the ratings of one of the world's leading telecommunications
carriers, Telefonica S.A. (Telefonica), and
its guaranteed subsidiaries, following the European Commission decision
to block the sale of O2 UK (O2) to CK Hutchison Holdings Limited (A3 stable,
Hutchison) in light of competition, innovation and quality concerns.
At the same time, Moody's affirmed all the ratings.
"The outlook change to negative reflects our expectation that the European
Commission´s decision to block the sale of O2 UK will delay Telefonica´s
efforts to de-lever, keeping leverage ratios higher for longer
than expected and increasing execution risk," says Carlos Winzer,
a Moody's Senior Vice President and lead analyst for Telefonica.
Telefonica's management remains committed to a maximum reported
leverage of 2.35x (which is broadly equivalent to a Moody´s
net adjusted debt/EBITDA ratio of around 3.0x) and has an alternative
plan to offset the setback caused by the cancelation of the deal with
Hutchison. However, in the absence of cash proceeds from
the disposal of O2 it will take longer than anticipated to de-lever
the business in line with the maximum leverage goal.
Telefonica's Baa2 rating could be downgraded without clear evidence
of progress made by the company toward deleveraging this calendar year,
with the expectation of full deleveraging by the second half of 2017.
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
-- CHANGE OF OUTLOOK TO NEGATIVE
Today's change in outlook reflects Moody's expectation of a delay
in the execution of Telefonica´s deleveraging strategy as a result
of the recently announced failure to close the sale of O2 to Hutchison.
The sale fell through as a result of the European Commission decision
to block the deal in light of competition, innovation and choice
concerns.
Moody's expected that Telefonica would use the approximate EUR14
billion in cash proceeds (GBP10.25 billion) from the sale to reduce
debt, leading to rapid deleveraging by end-2016.
The negative outlook reflects the fact that Telefonica's ratings
will remain weakly positioned and any deviation in the execution of the
deleveraging plan through mid-2017 will most likely trigger a rating
downgrade.
-- AFFIRMATION OF Baa2 RATING
The affirmation of the Baa2 ratings reflects Moody's expectation
that despite a delay in executing the sale of O2, Telefonica will
stick to its plan of deleveraging to a reported net debt/EBITDA of 2.35x.
Now that the O2 deal with Hutchison has been prohibited by the European
Commission, the company will seek alternative methods to achieve
its goal, which will take longer and entail greater execution risk.
For example, Telefonica said it was looking to either divest O2
in the capital markets or find an alternative buyer, among several
alternatives. It has also indicated potential alternative plans
that could include the issuance of hybrid instruments, selling real
estate assets, paying shareholders a scrip dividend, pursuing
a partial sale of its telecom infrastructure company Telxius and the sale
of other smaller non-strategic assets.
The affirmation also factors in Moody's belief that Telefonica will
continue to improve its underlying operating performance, especially
in Spain where growing revenues and EBITDA will drive better revenue trends.
Recently announced Q1 results support this thesis, with the improving
operating performance trend in Spain and Germany gaining traction and
operations in Brazil remaining resilient to the economic recession.
Telefonica's Baa2 rating primarily reflects (1) the group's large size
and scale; (2) the diversification benefits associated with its strong
positions in many different markets; (3) the enhanced technology,
exclusive TV-content and bundled offers that improves its market
positioning; (4) management's track record and ability in terms of
executing a well-defined and concise business strategy; and
(5) its operating cash flow generation and management's commitment to
achieving its reported net debt/EBITDA ratio below 2.35x in the
medium term.
Telefonica's Baa2 rating also continues to reflect (1) management's ability
to continue to execute a strategy that benefits from a strong position
in the Spanish market and has a strong international foothold including
in Latin America and Germany; (2) expectations that the group will
deliver the financial policy (including cash preservation measures and
a non-core assets disposal programme) management has publicly committed
to, which supports its deleveraging and strategy to strengthen its
finances; and (3) that Telefonica will maintain its access to the
debt capital markets and as such, retain adequate liquidity,
supported by recent bond issuances and asset sales.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on the ratings primarily reflects the increased execution
risk that Telefonica's deleveraging plan faces, despite Moody´s
expectation that it will continue to operate in an improved domestic market,
with more rational competition focused on value and better underlying
economic conditions that will support medium-term revenue growth.
WHAT COULD CHANGE THE RATING UP/DOWN
Although unlikely given the current negative outlook, Moody's would
consider an upgrade of Telefonica's rating to Baa1 if the company's credit
metrics were to strengthen significantly as a result of improved operational
cash flows and debt reduction. More specifically, the rating
could benefit from positive pressure if it became clear that the group
were able to achieve sustainable improvements in its debt ratios,
such as an adjusted retained cash flow/net debt ratio above the mid-twenties
in percentage terms and an adjusted net debt/EBITDA ratio comfortably
below 2.5x.
Conversely, a rating downgrade could result if (1) Telefonica were
to deviate from its financial-strengthening plan, as a result
of weaker cash flow generation or difficulty in executing announced debt
reduction measures; and/or (2) the group's operating performance
in Spain and other key markets were to deteriorate with no likelihood
of short-term improvement in underlying trends. Resulting
metrics would include an retained cash flow/net adjusted debt ratio of
less than 18% or failure to achieve a net adjusted debt/EBITDA
ratio of 3.0x. In addition, a rating downgrade could
result if Moody's were to downgrade the sovereign rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Telecommunications
Industry published in December 2010. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
Telefonica S.A., domiciled in Madrid, Spain,
is a leading global integrated telecommunications provider, delivering
a full range of fixed and mobile telecommunications. Telefonica
is one of the world's leading telecommunications carriers, with
some 321.9 million customers worldwide as of March 2016.
In Latin America (LatAm), Telefonica provided services to around
231.6 million customers as of the end of March 2016 and is the
leading operator in Brazil, Argentina, Chile and Peru,
with substantial operations in Colombia, Ecuador, El Salvador,
Guatemala, Mexico, Nicaragua, Panama, Uruguay,
Costa Rica and Venezuela. In addition to its LatAm presence since
1991, Telefonica has a strong footprint in the UK and Germany,
providing services to around 73.5 million customers as of March
2016. Approximately 69% of group revenues and 61%
of group reported EBITDA were generated outside Spain according to Moody's
calculations in 2015. Nevertheless, it's worth noticing that
the EBITDA minus Capex amount generated in Spain represents nearly 53%
of total.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Telefonica Emisiones S.A.U.
....Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)Baa2
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed Baa2
..Issuer: Telefonica Europe B.V.
.... Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)Baa2
.... Backed Preference Stock Preference Stock,
Affirmed Ba1
.... Backed Senior Unsecured Bank Credit Facility,
Affirmed Baa2
.... Backed Senior Unsecured Commercial Paper,
Affirmed P-2
.... Backed Senior Unsecured Regular Bond/Debenture,
Affirmed Baa2
.... Backed Senior Unsecured Shelf,
Affirmed (P)Baa2
..Issuer: Telefonica Finance USA LLC
.... Backed Pref. Stock Preferred Stock,
Affirmed Ba1
..Issuer: Telefonica Participaciones, S.A.U.
.... Backed Senior Unsecured Conv./Exch.
Bond/Debenture, Affirmed Baa2
..Issuer: Telefonica S.A.
.... Commercial Paper, Affirmed P-2
....Senior Unsecured Bank Credit Facility,
Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa2
Outlook Actions:
..Issuer: Telefonica Emisiones S.A.U.
....Outlook, Changed To Negative From
Stable
..Issuer: Telefonica Europe B.V.
....Outlook, Changed To Negative From
Stable
..Issuer: Telefonica Finance USA LLC
....Outlook, Changed To Negative From
Stable
..Issuer: Telefonica Participaciones, S.A.U.
....Outlook, Changed To Negative From
Stable
..Issuer: Telefonica S.A.
....Outlook, Changed To Negative From
Stable
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
SUBSCRIBERS: 44 20 7772 5454
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
Moody's changes outlook on Telefonica S.A.'s Baa2 rating to negative; affirms ratings
