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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
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
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
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.
Senior Vice President
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David G. Staples
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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