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Rating Action:

Moody's downgrades BT's and EE's ratings to Baa2; stable outlook

23 Mar 2018

Madrid, March 23, 2018 -- Moody's Investors Service (Moody's) has today downgraded to Baa2 from Baa1 the long-term issuer ratings of British Telecommunications Plc (BT) and its wholly owned subsidiary, EE Limited (EE). Concurrently, Moody's has also downgraded to Baa2 from Baa1 the senior unsecured ratings of BT and EE Finance Plc and to (P)Baa2 from (P)Baa1 BT's MTN programme and senior unsecured shelf ratings and EE Finance Plc's senior unsecured MTN rating.

The outlook on all ratings is stable.

"The ratings downgrade reflects our expectation that BT's credit metrics will remain weak due to a deterioration in its underlying operating performance trends, a significant capital spending risk, and the sustained large pension deficit, further weakening the company's cash flow generation and delaying the company's deleveraging prospects," says Laura Pérez, Moody's Vice President -- Senior Analyst and lead analyst for BT.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The rating downgrade reflects Moody's expectation that BT's adjusted debt to EBITDA and retained cash flow to net debt ratios will remain at around 3.1x-3.2x and 20%, respectively, over the next two years, which is well above the respective 2.8x and 22% thresholds for the existing Baa1 rating.

BT's underlying operating performance has weakened since the company announced a profit warning in January 2017. This weakness reflects structural pressures in its business segment owing to the decline of demand for traditional voice products, in addition to cyclical factors stemming from wider pressure on public-sector budgets. Furthermore, BT's consumer revenue growth is slowing as the broadband market in the UK matures and the competitive environment intensifies. As a result, Moody's expects that BT's revenues will decline by around 1 per cent per annum, with broadly stable EBITDA at around GBP7.5 billion until 2020, which is at the low-end of the company's GBP7.5 billion-GBP7.6 billion guidance for the current fiscal year 2018.

BT's pension deficit remains high at GBP9.5 billion (gross of tax) as at December 2017 on an IAS19 basis. While BT's actuarial pension triennial valuation review is expected to be completed by the end of June 2018, because of lower interest rates, Moody's expects the actuarial pension deficit to increase significantly compared to the GBP7 billion in the last actuarial pension triennial valuation review in 2014. This expected increase in the pension deficit could lead to higher pension cash contributions and/or potential greater structural subordination risks for bondholders given that BT could potentially provide its pension trustee with a priority claim over certain assets.

In addition, Moody's notes that BT's cash flow generation is exposed to the significant risk of increased fibre capital investment. Openreach is in discussions to step up its fibre investment plan with its key stakeholders, including communication providers, Ofcom and the government, to supply an additional 10 million premises by the mid-2020s, up from the recently upgraded 3 million premises by the end of 2020 commitment. The company estimates this could cost around GBP3 billion-GBP6 billion, excluding connection costs. However, the rise in capital spending is, in part, contingent on BT having greater confidence on the regulatory framework being conducive to supporting long-term investments. One of the aims is to ensure Openreach would have a conducive regulatory framework and ability to earn an acceptable return to support a viable business case. Moody's believes that BT's capex is likely to increase from the relatively low 14% of revenues expected in fiscal 2018, given the low fibre coverage plans compared to European peers whose average capital spending is around 17% of revenues.

The Baa2 rating continues to reflect BT's strong business profile as the only integrated player in the UK market. This integrated business model would enable it to improve its underlying operating performance by accelerating a convergent strategy as has been the case for a number of European integrated players. However, the pace of convergence has been slower than Moody's had anticipated.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects BT's strong business model and Moody's expectation of broadly stable EBITDA of around GBP7.5 billion over the next 18-24 months, leading to credit metrics such as adjusted debt/EBITDA of 3.1x-3.2x and RCF to adjusted net debt of around 20% over the next two years.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could arise if underlying operating performance and cash flow generation substantially improves with growing revenues and stronger KPI trends leading to a sustainable EBITDA growth trajectory, coupled with greater visibility in capital spending. Credit metrics that would support a rating upgrade include RCF/adjusted net debt sustainably above 22% and adjusted debt/EBITDA exceeding 2.8x on a sustained basis.

Downward pressure on the rating could arise if operating performance remains weaker than expected, or the risks arising from the pension deficit significantly increases as a result of a widening in the deficit or actions that could be detrimental for bondholders, e.g. material subordination risks. Credit metrics that would support a rating downgrade include RCF/adjusted net debt sustainably falling below 18% and adjusted debt/EBITDA exceeding 3.5x on a sustained basis.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: British Telecommunications Plc

....Long-term Issuer Rating, Downgraded to Baa2 from Baa1

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1

..Issuer: EE Finance Plc

....Backed Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

..Issuer: EE Limited

....Long-term Issuer Rating, Downgraded to Baa2 from Baa1

Outlook Actions:

..Issuer: British Telecommunications Plc

....Outlook, Changed To Stable From Negative

..Issuer: EE Finance Plc

....Outlook, Changed To Stable From Negative

..Issuer: EE Limited

....Outlook, Changed To Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

BT Group Plc, which operates principally through its 100%-owned subsidiary British Telecommunications Plc, is the leading provider of local, long-distance and international telecommunications services in the UK and one of the world's leading providers of communication solutions and services, operating in more than 170 countries. Following the completion of its GBP12.5 billion acquisition of EE Limited in January 2016, BT is also one of the largest mobile network operators in the UK. In the last 12 months ended December 2017, the company generated revenues of GBP23.9 billion and EBITDA and GBP7.5 billion.

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.

Laura Perez Martinez
Vice President - Senior Analyst
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
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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