Madrid, October 18, 2012 -- Moody's Investors Service has today confirmed the Baa2 long-term
senior unsecured ratings and issuer ratings of Telefonica S.A.
well as the ratings of all of its guaranteed subsidiaries, including
the Ba1 subordinated preferred stock ratings. Moody's has
assigned negative outlooks on all of these ratings, in line with
the negative outlook for Spain.
Concurrently, the rating agency has also confirmed Telefonica's
short-term Prime-2 rating. This concludes the review
for downgrade that Moody's had initiated for Telefonica on 20 June
2012.
Today's announcement follows the confirmation of the Kingdom of
Spain's government bond ratings at Baa3 with a negative outlook.
For full details on the rationale for the sovereign rating confirmation,
please refer to the press release of 16 October 2012 (http://www.moodys.com/research/Moodys-confirms-Spains-government-bond-rating-at-Baa3PP-3-assigns--PR_257500).
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
The rating confirmation reflects Moody's expectation that:
(1) management will be able to continue to execute a strategy that offsets
Spain's challenging macroeconomic environment and contraction in
consumer spending, which will continue to affect Telefonica's
domestic revenues;
(2) the group will deliver the financial policy (including cash preservation
measures and a non-core assets disposal programme) that management
has publicly committed to, which supports its deleveraging and financial
strengthening strategy; and
(3) Telefonica will maintain its access to the debt capital markets and
as such retain adequate liquidity, supported by recent bond issuances
and asset sales that have enabled the group to strengthen its liquidity.
"We believe that Telefonica has somewhat improved its credit metrics
over the past few months by reducing shareholder distributions,
selling a number of non-core assets including its call-centre
unit, Atento, and making progress on its IPO of Telefonica
Deutschland Holding AG, which it hopes will raise approximately
EUR1.5 billion," says Carlos Winzer, a Moody's
Senior Vice President and lead analyst for Telefonica. "However
it is still significantly constrained by the difficult operating conditions
in its domestic market, Spain." adds Mr. Winzer.
Moody's notes that although Telefonica has taken decisive measures
to mitigate the effects of the difficult operating environment in Spain,
continued pressure on the group's revenues and EBITDA will continue
to challenge its ability to improve its credit metrics. In this
respect, Moody's now expects flat revenues with some margin
compression at the group level for full year 2012, with a double-digit
decline in Telefonica's domestic revenues in percentage terms being
largely offset by growth in its international subsidiaries. Moody's
also expects that management will only just fall short of its leverage
target of reported net debt/EBITDA of 2.35x in 2012. The
rating agency forecasts that Telefonica's ratios will be within
the stated guidance for the current rating, including adjusted net
debt/EBITDA comfortably below 3.0x and retained cash flow (RCF)/adjusted
debt above 18%.
From a liquidity perspective, as of June 2012, Telefónica
had around EUR4.0 billion in cash and cash equivalents.
In addition to the issuances by its subsidiaries in South America for
a combined amount of EUR1.7 billion equivalent and new credit facilities
in excess of EUR1.0 billion equivalent, during the past few
months, Telefonica has placed two large bond issues in the euro
market totalling EUR2.2 billion. The group's also
has robust external liquidity sources, with EUR5.3 billion
of unused long-term (maturing after 2013) committed credit lines
as of June 2012. Moody's expects that Telefónica will
continue to effectively manage its liquidity risk, including pre-funding
its average annual debt maturities, and will not experience any
refinancing stress in the medium term.
Telefonica's Baa2 rating otherwise reflects (1) the group's
large size and scale; (2) the diversification benefits associated
with its strong positions in many different markets; (3) management's
track record and ability to execute a well-defined and concise
business strategy; and (4) its operating cash flow generation and
management's stated commitment to maintain its reported net debt/EBITDA
ratio below 2.35x.
RATIONALE FOR NEGATIVE OUTLOOK
Moody's decision to assign a negative outlook on the ratings reflects
its expectation that the group will continue to operate in a challenging
domestic market (Spain). Despite Telefonica's international
diversification enhancing its credit profile, the group's
exposure to the Spanish market puts it at risk given the weak macroeconomic
conditions in Spain, exacerbated by the contraction in consumer
spending resulting from austerity measures.
WHAT COULD CHANGE THE RATING UP/DOWN
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 the incurrence or assumption of further substantial
debt in conjunction with the pursuit of acquisitions or more aggressive
shareholder distribution policies; and/or (2) the group's operating
performance in Spain and other key markets continues to deteriorate and
there is no likelihood of an improvement in underlying trends in the short
term. Resulting metrics would include deviation from management
target metrics or an RCF/net adjusted debt ratio of less than 18%
and a net adjusted debt/EBITDA ratio trending towards 3.0x.
In addition, a rating downgrade could result if Moody's were
to downgrade the sovereign rating.
Although not currently expected in light of the negative outlook,
the weak macroeconomic conditions in Spain and constraints related to
the sovereign rating, Moody's could consider a rating upgrade
to Baa1 if Telefonica's credit metrics were to strengthen significantly
as a result of improvements in its operational cash flows and a further
reduction in debt. Provided sovereign-related concerns were
to abate, the rating could benefit from positive pressure if it
became clear that the group would achieve sustainable improvements in
its debt ratios, such as an adjusted RCF/net debt ratio above the
mid-twenties in percentage terms and adjusted net debt/EBITDA comfortably
below 2.5x.
LIST OF AFFECTED RATINGS
Outlook Actions:
..Issuer: Telefonica Emisiones S.A.U.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Telefonica Europe B.V.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Telefonica Finance USA LLC
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Telefonica S.A.
....Outlook, Changed To Negative From
Rating Under Review
Confirmations:
..Issuer: Telefonica Emisiones S.A.U.
....Multiple Seniority Medium-Term
Note Program, Confirmed at (P)Baa2
....Multiple Seniority Medium-Term
Note Program, Confirmed at (P)Baa2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
....Senior Unsecured Shelf, Confirmed
at (P)Baa2
..Issuer: Telefonica Europe B.V.
....Multiple Seniority Medium-Term
Note Program, Confirmed at (P)Baa2
....Senior Unsecured Bank Credit Facility,
Confirmed at Baa2
....Senior Unsecured Commercial Paper,
Confirmed at P-2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
....Senior Unsecured Shelf, Confirmed
at (P)Baa2
..Issuer: Telefonica Finance USA LLC
....Pref. Stock Preferred Stock,
Confirmed at Ba1
..Issuer: Telefonica S.A.
.... Commercial Paper, Confirmed at
P-2
....Senior Unsecured Bank Credit Facility,
Confirmed at Baa2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Telecommunications
Industry published in December 2010. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
Telefonica S.A. is the leading integrated telecommunications
provider in Spain, delivering a full range of services and products
including telephony, data exchange, interactive content and
information and communications technology solutions. Telefonica
is also one of the world's leading telecommunications carriers,
with some 264.3 million customers worldwide (excluding Spain).
As of June 2012, 75% of group revenues and 77% of
group EBITDA were generated outside Spain. Telefonica's full-year
2011 revenues and EBITDA amounted to EUR62.8 billion and EUR19.4
billion, respectively.
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 ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings 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
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings 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 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
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A member of the board of directors of this rated entity may also be a
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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
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Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
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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
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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
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Moody's confirms Telefonica at Baa2; outlook negative
