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Announcement:

Moody's changes the outlook on TPSA's A3 ratings to negative

14 Nov 2012

Madrid, November 14, 2012 -- Moody's Investors Service has today changed the outlook on the A3 ratings of Telekomunikacja Polska S.A. (TPSA) and its fully guaranteed subsidiaries TPSA Eurofinance B.V and TPSA Eurofinance France S.A to negative from stable. The outlook change reflects Moody's view that TPSA will face an increasingly challenging operating environment, mainly due to the fiercely competitive nature of the Polish mobile and fixed market segments, and tough regulation.

RATINGS RATIONALE

"Today's action specifically reflects our concern that expected further declines in revenues in 2013, as a result of competitive and regulatory pressures, will negatively affect TPSA's financial metrics," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for TPSA. "As a result, we question the ability of the company to continue to sustain historically strong financial metrics," explains Mr. Winzer. "A significant deviation in reported net debt/EBITDA ratio above management's guidance of 1.5x in 2013 could trigger a rating downgrade."

TPSA's recent quarterly performance suggests that a more challenging operating environment is developing in Poland, in which the company suffered a c. 5% decline in revenues and c. 9% decline in reported EBITDA in Q3 2012 compared with Q3 2011. This challenging environment will test management's ability to successfully execute its business and financial strategies.

The expected deterioration in TPSA's operating performance reflects (1) mobile termination rate (MTR) cuts imposed by the Polish telecoms regulator for 2013 (TPSA and PTC, Poland's third-largest mobile operator by market share, will see their MTRs cut by 33% at the start of 2013 and then by a further 52% to a final PLN0.0429 (equivalent to around EUR0.01) per minute in July 2013); (2) revenue declines in the enterprise segment; and (3) a fiercely competitive mobile market, in which the launch of unlimited flat-rate mobile offers in Q2 2012 has affected TPSA's revenues.

Given these adversities, Moody's will closely monitor TPSA's ability to accelerate cost-cutting initiatives, in addition to its cut in dividends, and capital expenditure reductions or other cash preservation measures in the short term to offset the more adverse operating conditions and comply with the ratio guidance for the current rating level. Moreover, Moody's will monitor TPSA's operational strengths and the extent to which the company remains well placed at the current rating level to overcome the tough regulatory environment, as well as cope with the increased competitor activity in both the fixed and mobile markets in Poland.

TPSA's financial flexibility has historically provided it with a robust position from which to deal with any contingent liabilities. However, Moody's perceives that TPSA's operating environment is one of increased business risk, which the company will have to offset with a sustainably strong financial profile.

TPSA has publicly committed to maintaining a maximum reported net debt/EBITDA ratio of 1.5x or below. Moody's will closely monitor (1) the extent to which the company might exceed this level in 2013, and (2) when it will return to a reported net debt/EBITDA ratio of below 1.5x as a result of its underlying cash flow generation and prudent financial policies. In addition, Moody's does not expect TPSA to make any large-scale acquisitions, although minor domestic bolt-on transactions are possible.

TPSA's rating and outlook are currently aligned with those of its controlling parent company, France Telecom (A3 negative), which exerts significant influence on TPSA. Given the increasing business risk in TPSA's operations and more challenging operating conditions, Moody's expects TPSA to sustain strong financial metrics in order to maintain the current A3 rating, which is at the same level as France Telecom's final rating, but one-notch higher than France Telecom's standalone BCA of baa1.

TPSA's A3 rating reflects its leading position as an integrated incumbent operator in the Polish market, and Moody's expectation that it will continue to maintain its leadership within a tough regulatory environment and increasingly competitive market. The rating also reflects the company's (1) cost optimisation strategies and prudent financial policy; (2) conservative credit metrics to date; and (3) good liquidity management. Although the rating of TPSA does not factor in explicit support from France Telecom, Moody's positively value the fact that the company is controlled and closely supervised by France Telecom, which (1) controls the supervisory board of TPSA (with seven out of 13 of the members nominated by France Telecom); and (2) fully consolidates TPSA into its own reported results. TPSA also benefits from (1) the strength of France Telecom's owned Orange brand; (2) its procurement agreements with France Telecom and sharing research and development (R&D) expenses with the company; and (3) the perceived strong implicit support from France Telecom. Whilst TPSA's rating is predominantly based on a standalone assessment, Moody's nevertheless regards the company's credit profile as having a degree of correlation with that of its main shareholder, France Telecom.

The negative outlook reflects Moody's concerns related to TPSA's deteriorating operating performance, which will continue to affect the company's revenues and operating cash flow. The rating is now more weakly positioned in its category. In particular, Moody's will monitor management's ability to sustain financial metrics that are in line with the current rating under the financial ratio guidance. In addition, the outlook reflects uncertainties regarding TPSA's ability to timely refinance its maturities over the next 18 months. This, combined with a possible spectrum acquisition in late 2013, could exert some pressure on the company's liquidity.

WHAT COULD CHANGE THE RATING DOWN/UP

A rating downgrade could result if there were to be a deterioration in TPSA's operational performance that in turn led to a significant deterioration in credit metrics. An example of such a deterioration would be adjusted retained cash flow (RCF)/debt falling to around 30% and adjusted debt/EBITDA trending towards 2.0x. As stated above, any significant deviation from the publicly stated operating and financial committed guidelines (including management's reported net debt/EBITDA below 1.5x ratio) would also exert pressure on the rating. In addition, a downgrade could result from the company experiencing any liquidity constraints due to difficulties financing its cash needs or refinancing its maturing debt over the next 18 months.

Given the negative outlook on the rating, Moody's currently considers upward rating pressure to be unlikely. The rating of TPSA is aligned to the rating of France Telecom (A3, negative) and therefore an upgrade would likely be preceded by an upgrade in France Telecom's rating. In addition, before considering upgrading TPSA's rating, Moody's would require TPSA to demonstrate significant deleveraging capacity by sustainably generating stronger positive free cash flow from both its fixed-line and wireless operations on the back of more supportive industry conditions.

PRINCIPAL METHODOLOGY

The principal methodology used in rating Telekomunikacja Polska S.A., TPSA Eurofinance B.V. and TPSA Eurofinance France S.A. was the Global Telecommunications Industry Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Telekomunikacja Polska S.A. (TPSA) is domiciled in Warsaw, Poland. It is the leading integrated telecommunications provider in Poland. TPSA has a nationwide presence, delivering a full range of services and products, including telephony, data exchange, interactive content, TV and information and communication technology (ICT) solutions. The company reports that it supplies 5.2 million retail fixed voice lines and 2.3 million fixed-line broadband lines, serving approximately 695,000 TV customers as of September 2012. TPSA's wireless services are provided by its 100%-owned subsidiary PTK Centertel under the brand name Orange. PTK services some 14.8 million mobile customers (as of September 2012). TPSA operates only in Poland and has no international diversification. The company's main shareholder is France Telecom (A3 negative), which holds a 50.7% stake. TPSA's revenues for the nine-month period to September 2012 amounted to PLN10.7 billion (EUR2.6billion) and EBITDA for the same period was PLN3.8 billion (EUR1billion). TPSA Eurofinance B.V. and TPSA Eurofinance France S.A. are fully guaranteed subsidiaries of TPSA.

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.

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Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

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

Paloma San Valentin
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 the outlook on TPSA's A3 ratings to negative
No Related Data.
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