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Rating Action:

Moody's confirms Telekom Slovenije's Ba2 ratings with a negative outlook

29 Sep 2015

Madrid, September 29, 2015 -- Moody's Investors Service has today confirmed Slovenian telecoms provider Telekom Slovenije d.d.'s Ba2 corporate family rating, Ba2-PD probability of default rating and Ba2 senior unsecured ratings. The outlook on the ratings is negative.

The rating action concludes the review process that was initiated on 18 June 2015.

"This confirmation reflects our expectation that the company is now focused on refinancing its large bond maturity in December 2016 and we assume a successful completion of this refinancing exercise in the near term, which will be a positive development for the company's credit profile," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for Telekom Slovenije.

"This refinancing exercise is now the company's priority following the failed sale of the Slovenian government's stake in Telekom Slovenije to Cinven and the termination of the privatisation process," adds Mr Palacios.

RATINGS RATIONALE

The confirmation of the rating at Ba2 reflects Moody's expectation that the company will make substantial progress over the coming months in refinancing its December 2016 bond maturity. While the refinancing exercise has only recently started and could take some time to complete, this process is now a priority for the management team.

Moody's views the successful completion of the refinancing exercise as highly likely, in light of Telekom Slovenije's state ownership and its relatively strong business and financial profiles, which make it an attractive credit for domestic and international lenders.

With low financial leverage relative to other Ba2 rated credits and a strong market position, the rating considers that Telekom Slovenije has the potential to weather the current negative operating trends facing the company.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects that, while the probability of completing the refinancing exercise is very high, the process is subject to a number of bureaucratic approvals that could delay the whole exercise and increase the difficulty or cost of completion.

The negative outlook also reflects the company's challenging operating environment, characterised by continued revenue declines, mainly driven by price pressures in the mobile business and in the B2B segment. In the fixed line segment, fibre regulation is obliging the incumbent to open its network to competitors at low prices, reducing the competitive advantage of network quality differentiation. In addition, Telekom Slovenije is now competing with stronger integrated players, after the acquisition of Tusmobil by Telemach and the acquisition of Amis by Telekom Austria, the owner of Si.mobil.

In light of the pressure on revenues, the company can only continue to cut costs in order to mitigate the impact on profitability and cash flows. Moody's also notes that free cash flows could also come under pressure if (1) the company keeps its current aggressive dividend policy; (2) it buys spectrum in an auction that the government plans to complete in 2016; or (3) it increases capex in order to help the country meet the European Commission's Digital Agenda targets, where it lags behind the European average.

The negative outlook also factors in the event risk related to the company's participation in the privatisation process of Telekom Srbija, the incumbent operator in Serbia. Moody's understands that Telekom Slovenije has submitted a non-binding offer for Telekom Srbija, in a process that could be completed in the coming months. Telekom Srbija is a larger company than Telekom Slovenije and therefore a fully debt-financed acquisition of the target could increase Telekom Slovenije's leverage substantially.

WHAT COULD CHANGE THE RATING DOWN/UP

The rating could come under further downward pressure if (1) Telekom Slovenije does not complete the refinancing of the 2016 bond maturity in the near term; (2) the company's underlying operating performance weakens beyond current expectations; (3) the company were to make large extraordinary shareholder distributions, or material debt-financed acquisitions, investments or cash calls as a result of litigation such that its credit metrics deteriorated (including adjusted retained cash flow (RCF)/debt sustainably below 25% and adjusted debt/EBITDA towards 2.5x).

We do not currently anticipate upward rating pressure in light of the negative rating outlook. Upward rating pressure would require (1) an improvement in Telekom Slovenije's liquidity profile; (2) an improvement in the overall business conditions supporting stronger revenue, EBITDA and cash flow growth; and (3) the company to sustain its current credit metrics, such as adjusted debt/EBITDA well below 2.0x, together with positive free cash flow generation on a sustainable basis.

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.

Domiciled in Ljubljana, Slovenia, Telekom Slovenije d.d. is an integrated telecommunications provider in Slovenia, with a presence in Kosovo, Macedonia, Bosnia and Herzegovina, Croatia, Serbia and Montenegro. In 2014, Telekom Slovenije reported operating revenues of EUR756 million and EBITDA of EUR170 million.

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 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 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 rating action, and whose ratings may change as a result of this 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.

Ivan Palacios
VP - Senior Credit Officer
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 confirms Telekom Slovenije's Ba2 ratings with a negative outlook
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