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Rating Action:

Moody's downgrades Deutsche Telekom's ratings to Baa1 with Stable Outlook; P-2 Affirmed

19 May 2008
Moody's downgrades Deutsche Telekom's ratings to Baa1 with Stable Outlook; P-2 Affirmed

Madrid, May 19, 2008 -- Moody's Investors Service today downgraded the long-term ratings of Deutsche Telekom AG ("DT") and its guaranteed subsidiary Deutsche Telekom International Finance B.V. to Baa1 from A3. The Prime-2 rating for the company's short-term debt was not affected and is affirmed. The rating outlook is now stable. This concludes the review process initiated on 17 March 2008.

The rating downgrade was prompted by Moody's assessment following the conclusion of the negotiations between DT and the Greek government with regard to DT acquiring a controlling equity stake in Hellenic Telecommunications Organization S.A. ("OTE") that although the OTE transaction will have positive business implications for DT's international growth objectives in south-eastern Europe, it is Moody's assessment that further acquisitions are possible over the medium term and thus the improvements in credit metrics previously articulated by Moody's as expectations within the rating category are now less likely to be achieved. It furthermore marks a higher probability of DT pursuing further a strategy of making debt financed acquisitions to further develop its international footprint at a time of challenging domestic market conditions, which will continue to exert pressure on revenues, EBITDA and cash flow. As a result of this conclusion, Moody's believes that it is more appropriate to position DT's baseline credit assessment ("BCA") -- one of its rating inputs under Moody's methodology for Government-Related Issuers ("GRIs") -- within the mid-range rather than low-range of 8-10 (on a scale of 1-21, where 1 represents the lowest level of credit risk).

The rating downgrade is also prompted by the perception on Moody's part of a slight weakening that has occurred in the Support factor -- one of the other rating inputs - within the 'medium' category, in light of the continuing changes in the scope of DT's international activities. Moody's explained that DT's strategic importance to the German state and its implicit support perception nevertheless remains. The slight weakening within the medium Support category though arises from the company's further expansion of its international footprint, as a result of which international subsidiaries now contribute 57% of the group's revenues. The potential further reduction in the German government's stake in DT is an additional element behind the weakening in the support assessment, despite that both the government and KfW have indicated their commitment to remaining the largest shareholders in DT.

Moody's noted that, as a result of the negotiations and final shareholder agreements associated with the OTE transaction alone, DT will increase its total debt (including the put options and assumed debt) by some EUR10 billion, which will exert some pressure on the company's financial ratios. Moody's expects DT's debt-to-EBITDA ratio to be 3.0x and the retained cash flow to debt ratio to now remain below 20% over the short to medium term rather than improving to the 25% range as previously expected.

DT has agreed with the Greek government that it will acquire an initial 25% of the ordinary share capital of OTE for approximately EUR3.2 billion. In addition, the Greek government can put an additional 5% stake in OTE to DT for a 12-month period from October 2008 at a price of EUR27.5 per share (EUR674 million in total) and a further 10% stake until 2011 at a 15-20% premium to the market price (a further estimated EUR1.2 billion). The total debt adjustment for both of these puts amounts to around EUR2 billion, resulting in total additional debt for DT of around EUR10 billion. In addition, DT will have pre-emptive rights over the Greek government's remaining 10% holding, which indicates that DT may end up achieving a 50% stake plus one share in OTE. DT will fully consolidate OTE from H2 2008. The transaction is subject to customary conditions including approvals from regulators and the Greek government.

DT and the Greek government will each appoint five members of the 11-person board, with DT also appointing the CEO (who will have the casting vote in the event of a deadlock). The Greek government will appoint the chairman. The shareholder agreement stipulates that the Greek government will vote alongside DT in any shareholder resolutions, although this obligation is waived with respect to certain decisions.

DT's liquidity profile for the next 12 months remains very solid, including the probable cash outflows during that period derived from the OTE transaction. Moody's believes that internal sources should enable the company to cover its debt maturities and other expected cash demands over the next 12 months. The company's internal cash flow generation is expected to exceed operating needs, capital expenditure and regular dividend payments. DT has around EUR5 billion in cash and cash equivalents. The company has no debt outstanding under its EUR20 billion US dollar commercial paper programme although, from time to time, it does make very limited use of this facility. DT has approximately EUR17 billion of unutilised bilateral bank facilities with no MAC or financial covenants. The facilities have maturities of up to three years with extension options after 12 months. The company plans to maintain a reasonable liquidity reserve position in the future.

Headquartered in Bonn, Deutsche Telekom is the leading provider of wireline and wireless telephony services in Germany. DT provides network access, communication services and value-added services via fixed and mobile networks nationwide; it is also one of the leading international providers of wireless services. Approximately 57% of the group revenues are generated outside Germany. DT's activities outside its home country include mobile telephone operations in the US, the UK, Poland, the Netherlands, Austria, the Czech Republic, Hungary, Slovakia, Croatia, Macedonia and Montenegro, and fixed-line operations in France (Club Internet). DT is currently 31.70% government-owned (14.83% directly and 16.87% through state-owned investment vehicle KfW). As such, DT qualifies as a Government-Related Issuer (GRI) under Moody's methodology.

Madrid
Carlos Winzer
Senior Vice President
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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