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Rating Action:

Moody's downgrades Telecom Italia's ratings to Baa3; negative outlook

Global Credit Research - 11 Feb 2013

Madrid, February 11, 2013 -- Moody's Investors Service has today downgraded to Baa3 from Baa2 the senior unsecured and issuer ratings of Telecom Italia S.p.a. (Telecom Italia) following the company's announcement of its 2012 year-end results, updated management outlook and revised financing strategy. All ratings have a negative outlook.

A full list of affected ratings is provided towards the end of this press release.

"The downgrade of Telecom Italia's ratings reflects the increased risks to its business from the challenging operating environment in its key domestic market," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telecom Italia. "Although management is taking actions, such as the cut in dividends and plan to issue hybrid bonds, to mitigate the effect of its deteriorating domestic performance on credit metrics, this is not sufficient to fully offset the company's increased business risk".

RATING RATIONALE

Today's rating action reflects the fact that, despite Telecom Italia having partially mitigated the effects of a very tough market, the company's year-end results reveal a deterioration in its domestic revenues and EBITDA, as well as a failure to achieve its committed reported net financial position target of EUR27.5 billion. As a result, Moody's considers that cash flow generation strength is weakening and that Telecom Italia's financial risk has increased. Moreover, this risk might not be fully offset by the company's proposed cut in its dividend and its plan to issue up to EUR3 billion of hybrid bonds over the next 18-24 months.

Moody's notes that Telecom Italia faced substantial challenges in 2012 including macroeconomic recession, regulation and competition, which have eroded the company's domestic revenues and EBITDA. In addition, although Telecom Italia was able to reduce group debt by some EUR2 billion, it could not fully achieve its committed target of reported net financial position of EUR27.5 billion (instead achieving EUR28.3 billion), given that free cash flow was weaker than expected and it has not yet completed the disposal of its Telecom Italia Media business. Furthermore, management has now changed its reported net financial position target for this year to below EUR27 billion from EUR25 billion. This combined with the company's public guidance to single-digit decline in reported EBITDA for 2013, represents a substantial deviation to Moody's previously expected gradual improvement trend.

Moody's recognises that despite Italy's business segment being particularly hit by the economic recession and the consumer mobile segment exposure to severe price reductions, Telecom Italia was able to partly mitigate the negative effect on margins in 2012, while overcoming many competitive challenges through taking a value-oriented commercial approach. In addition, the company was able to achieve some operational expenditure and capital expenditure efficiencies, confirming its strong track record in cash-cost savings and margin preservation.

Moody's also notes that Telecom Italia's credit metrics had been weak for the Baa2 rating category for some time, as reflected in the previous negative outlook. Based on the full-year figures, Moody's estimates that Telecom Italia's net adjusted debt/EBITDA in 2012 was around 2.9x (broadly in line with the ratio achieved in 2011), well above Moody's stated guidance of leverage trending towards the level of 2.5x in the medium term.

While Telecom Italia's proposed dividend cut to EUR450 million per annum through 2015, partly offsets the negative impact on its cash flow of its weaker-than-expected performance and the operating challenges ahead, it leaves the company with less internal options to protect its financial profile in the event of a further sustained deterioration in its operating performance.

Moody's remains concerned that Telecom Italia is facing stronger headwinds in its efforts to improve its financial ratios. Given the challenging operating conditions in Italy, Telecom Italia's management may find it difficult to meet its updated deleveraging commitment of reported net financial position/ EBITDA of below 2.0x.

Moody's considers that Telecom Italia's Baa3 rating is supported by the company's (1) scale; (2) integrated telecoms business model, with strong market positions in both the fixed and mobile segments; (3) geographical diversification, mainly as a result of its presence in Brazil and Argentina; (4) continued commitment to debt reduction and financial discipline; and (5) high operating margins, ongoing operational expenditure (opex) reductions and strong liquidity.

The Baa3 rating also factors in: (1) the deterioration in Telecom Italia's operating performance including an expected further EBITDA decline this year; (2) management's plan to partially offset the weakened performance with a more robust capital structure; and (3) the company's revised outlook for the period 2013-15.

OUTLOOK

The negative outlook on the ratings reflects the expected tough operating environment in Italy, as well as the fact that Telecom Italia's financial metrics are marginally positioned for the new rating category and could be downgraded if the company is not able to achieve the planned financial targets.

WHAT COULD CHANGE THE RATING DOWN/UP

Downward pressure on the rating could potentially result if Telecom Italia were to deviate from management's announced debt reduction plan, which includes a reported net financial position of less than EUR27 billion by year end 2013, and if the overall financial metrics do not gradually improve in line with their announced plan which includes positive low single digit revenue and EBITDA CAGR through 2015. More specifically, a rating downgrade could result if the company failed to sustainably reduce its net adjusted debt/EBITDA ratio to below 2.8x.

In view of today's action, Moody's does not currently anticipate upward rating pressure. However, Moody's could consider a stabilization of the outlook if the company delivered improved financial metrics on the back of a supportive operating environment, including a net adjusted debt/EBITDA comfortably below 2.8x. Upward pressure could result over time if Telecom Italia's adjusted net debt/EBITDA were to improve to below 2.5x.

LIST OF AFFECTED RATINGS

Rating downgrades:

..Issuer: Telecom Italia S.p.a.

....Issuer rating to Baa3 negative,

....Senior unsecured medium-term note programme to (P)Baa3 negative

....Senior unsecured bank credit facility to Baa3

....Senior unsecured regular bond/debenture to Baa3

....Senior unsecured regular bond/debenture to Baa3

Outlook actions:

..Issuer: Telecom Italia S.p.a..

....Outlook Negative

The principal methodology used in this rating was the Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Telecom Italia Group (consisting of Telecom Italia S.p.A. and its subsidiaries) is the leading integrated telecommunications provider in Italy, delivering a full range of services and products, including telephony, data exchange, interactive content and information and communications technology solutions. It is also the operator of one of the three national TV networks. The group is also one of the top telecoms players in Argentina and in the Brazilian mobile market, operating through its subsidiary Telecom Italia Mobile (TIM) Brazil. Telecom Italia's major shareholder is a consortium (Telco S.p.A.) composed of Telefónica (Baa2 Negative), the insurance company Generali, and the banks Mediobanca and Intesa Sanpaolo. This consortium holds a 22.4% stake in Telecom Italia. For 2012 Telecom Italia reported EUR29.5 billion in revenue and EUR 11.7 billion in EBITDA.

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.

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.

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
SUBSCRIBERS: 44 20 7772 5454

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
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Telecom Italia's ratings to Baa3; negative outlook
No Related Data.

 

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