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Rating Action:

Moody's downgrades Telefonica to Baa2; ratings remain on review for further downgrade

Global Credit Research - 20 Jun 2012

Madrid, June 20, 2012 -- Moody's Investors Service has today downgraded the long-term senior unsecured ratings and issuer ratings of Telefonica S.A. to Baa2 from Baa1. Concurrently, Moody's has also downgraded the ratings of all Telefonica's guaranteed subsidiaries, including the subordinated preferred stock ratings, to Ba1 from Baa3. All ratings, including the short-term Prime-2 rating, remain on review for further downgrade.

A comprehensive list of all ratings affected is included at the end of this press release.

The rating downgrades reflect:

(i) Moody's increasing concerns related to Spain's macroeconomic environment and the impact on consumer spending in the country, which will continue to affect Telefonica's domestic revenues;

(ii) the high shareholder distribution policy Telefonica has in place, which constrains the company's ability to generate free cash flow to reduce its debt; and

(iii) the execution risk related to management's deleveraging strategy, which will most likely translate into Telefonica finding it challenging to achieve ratios commensurate with a higher rating.

Today's actions also follow the weakening of the Spanish government's creditworthiness, as captured by Moody's downgrade of Spain's government bond ratings to Baa3 from A3 on 13 June 2012, and the initiation of a review for further downgrade. For more details on the rationale for the sovereign downgrade, please refer to the press release http://www.moodys.com/research/Moodys-downgrades-Spains-government-bond-rating-to-Baa3-from-A3--PR_248236.

Given the multiple channels of contagion that exist between the sovereign and corporate issuers domiciled in Spain, Moody´s considers it challenging for Telefonica, in the current circumstances, to mantain a rating of more than one notch higher than the sovereign rating. This in turn reflects the fact that, notwithstanding Telefonica's credit profile reflected in its new rating, the weakening of the Spanish government's creditworthiness creates a risk of contagion for issuers domiciled in or materially exposed to Spain as well as requiring substantial and recurrent access to debt capital markets for refinancing, such as Telefonica. For more details, please refer to Moody's February 2012 Rating Implementation Guidance "How Sovereign Credit Quality May Affect Other Ratings".

RATINGS RATIONALE

"The downgrade of Telefonica's long-term ratings reflects our view that the company does not have the domestic or financial strength, or sufficiently robust access to liquidity, to distance itself from the current and future credit environment implied by the sovereign's Baa3 rating," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telefonica.

Moody's points out that although Telefonica has taken some measures to mitigate the difficult operating environment in Spain -- including a modest reduction in shareholder remuneration in December 2011 and some asset disposals -- continued pressure on revenues and EBITDA will further challenge the company's ability to improve credit metrics as previously anticipated by Moody´s and consistent with the previous rating.

"We are particularly concerned about the weakness in Telefonica's financial ratios and do not expect it to meet the financial ratio guidance set for the previous rating level over the short to medium term," notes Mr. Winzer. This guidance included the expectation of debt reductions and operating performance reflecting a positive trend towards adjusted net debt/EBITDA of 2.5x and adjusted retained cash flow (RCF)/net debt sustained above 20%.

Although Telefonica will maintain its strong domestic and international market positions in view of management's strategy and business model, Moody's believes that the required strengthening of the company's financial ratios and challenging domestic and international operations will increase its overall business and financial risk.

Prior to today's one-notch downgrade, Moody's had already recognised that Telefonica's rating was weakly positioned in its previous rating category, with little margin for operating under-performance. The rating downgrade is also in line with Moody's previously published guidance for companies that would normally be expected to have a rating close to that of the government of the country in which they are located.

Telefonica's Baa2 rating reflects (i) the group's large size and scale; (ii) the diversification benefits associated with its strong positions in many different markets; (iii) its management's track record and ability to execute a well-defined and concise business strategy; and (iv) its operating cash flow generation and management's stated commitment to maintain its reported net debt/EBITDA ratio below 2.35x.

From a liquidity risk management perspective, Moody's believes that although Telefonica is effectively managing its upcoming maturities, uncertainty remains regarding the company's future access to the debt capital markets due to the macroeconomic crisis affecting Spain. At the end of March 2012, Telefonica had in excess of EUR5 billion in cash and cash equivalents. The group's external liquidity sources include EUR8 billion worth of committed long-term bank facilities, which were undrawn as of March 2012, and can be drawn at any time, not being subject to material adverse change (MAC) clauses or financial covenants. Telefonica has accumulated debt maturities in excess of EUR17 billion through the end of 2014.

RATIONALE FOR REVIEW FOR FURTHER DOWNGRADE

The ratings remain on review for further downgrade in line with the ongoing review for further downgrade of the Spanish sovereign rating. The review will therefore take account of the outcome of Moody's review of the sovereign rating as well as the extent to which Telefonica might be affected by the risk of contagion from a weaker sovereign, including (i) slowing economic activity; (ii) liquidity constraints, access to funding and higher financing costs; (iii) scope for increased austerity measures affecting operating fundamentals; and (iv) increased risks of political interference.

WHAT COULD CHANGE THE RATING UP/DOWN

A rating downgrade could arise if (i) Moody's were to downgrade the sovereign rating; or (ii) Telefonica were to deviate from its financial-strengthening plan, as a result of weaker cash flow or the incurrence or assumption of further substantial debt in conjunction with the pursuit of acquisitions or more aggressive shareholder distribution policies. Resulting metrics could include an RCF/net adjusted debt ratio trending towards 15% and a net adjusted debt/EBITDA ratio approaching 3.0x in the medium term. Any future strategic corporate transaction would have to be predominantly equity-financed and within Telefonica's current business footprint to prevent pressure being exerted on the rating. In addition, downward pressure on the ratings could develop if Moody's were to become concerned about Telefonica's ongoing access to funding at reasonable terms.

In line with today's action and the review for downgrade, positive pressure on the ratings is unlikely in the short to medium term. Provided sovereign-related concerns were to abate, Moody's could consider a rating upgrade to Baa1 if Telefonica's debt ratios were to strengthen significantly as a result of improvements in its operational cash flows and further reduction in debt. The rating could benefit from positive pressure if it became clear that the group would achieve sustainable improvements in its debt ratios, such as an adjusted RCF/net debt ratio trending towards the mid twenties and adjusted net debt/EBITDA comfortably below 2.5x.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Telefonica Emisiones S.A.U.

....EUR40000M Multiple Seniority Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1; Placed Under Review for further Possible Downgrade

....US$850M Senior Unsecured Regular Bond/Debenture Feb 4, 2013, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR24M Senior Unsecured Regular Bond/Debenture Jan 31, 2018, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR55M Senior Unsecured Regular Bond/Debenture Dec 30, 2021, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR400M Senior Unsecured Regular Bond/Debenture Jun 2, 2015, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR100M Senior Unsecured Regular Bond/Debenture Dec 23, 2014, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP750M 5.375% Senior Unsecured Regular Bond/Debenture Feb 2, 2018, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP500M 5.375% Senior Unsecured Regular Bond/Debenture Feb 2, 2026, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1250M 6.421% Senior Unsecured Regular Bond/Debenture Jun 20, 2016, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$2000M 7.045% Senior Unsecured Regular Bond/Debenture Jun 20, 2036, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP500M 5.888% Senior Unsecured Regular Bond/Debenture Jan 31, 2014, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....CZK2600M 4.623% Senior Unsecured Regular Bond/Debenture Jun 19, 2014, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$700M 6.221% Senior Unsecured Regular Bond/Debenture Jul 3, 2017, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$750M 5.855% Senior Unsecured Regular Bond/Debenture Feb 4, 2013, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1250M 4.949% Senior Unsecured Regular Bond/Debenture Jan 15, 2015, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1000M 5.877% Senior Unsecured Regular Bond/Debenture Jul 15, 2019, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP650M 5.289% Senior Unsecured Regular Bond/Debenture Dec 9, 2022, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1400M 5.134% Senior Unsecured Regular Bond/Debenture Apr 27, 2020, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1200M 2.582% Senior Unsecured Regular Bond/Debenture Apr 26, 2013, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$900M 3.729% Senior Unsecured Regular Bond/Debenture Apr 27, 2015, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP400M 5.445% Senior Unsecured Regular Bond/Debenture Oct 8, 2029, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1250M 3.992% Senior Unsecured Regular Bond/Debenture Feb 16, 2016, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1500M 5.462% Senior Unsecured Regular Bond/Debenture Feb 16, 2021, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP700M 5.597% Senior Unsecured Regular Bond/Debenture Mar 12, 2020, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....CZK1250M 3.934% Senior Unsecured Regular Bond/Debenture Mar 30, 2017, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1750M 4.375% Senior Unsecured Regular Bond/Debenture Feb 2, 2016, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1500M 4.674% Senior Unsecured Regular Bond/Debenture Feb 7, 2014, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1250M 5.58% Senior Unsecured Regular Bond/Debenture Jun 12, 2013, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR2000M 5.431% Senior Unsecured Regular Bond/Debenture Feb 3, 2014, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1500M 5.496% Senior Unsecured Regular Bond/Debenture Apr 1, 2016, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1750M 4.693% Senior Unsecured Regular Bond/Debenture Nov 11, 2019, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1400M 3.406% Senior Unsecured Regular Bond/Debenture Mar 24, 2015, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1000M 3.661% Senior Unsecured Regular Bond/Debenture Sep 18, 2017, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1420M 4.75% Senior Unsecured Regular Bond/Debenture Feb 7, 2017, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1000M 4.967% Senior Unsecured Regular Bond/Debenture Feb 3, 2016, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR1500M 4.797% Senior Unsecured Regular Bond/Debenture Feb 21, 2018, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

..Issuer: Telefonica Europe B.V.

....EUR8000M Multiple Seniority Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1; Placed Under Review for further Possible Downgrade

....GBP12333M Senior Unsecured Bank Credit Facility, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP6167M Senior Unsecured Bank Credit Facility, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP2100M Senior Unsecured Bank Credit Facility Dec 7, 2012, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....GBP2100M Senior Unsecured Bank Credit Facility Dec 7, 2013, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....JpnY5000M 4.75% Senior Unsecured Bank Credit Facility Jul 27, 2037, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....JpnY5000M 4.75% Senior Unsecured Bank Credit Facility Jul 27, 2037, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....JpnY5000M 4.75% Senior Unsecured Bank Credit Facility Jul 27, 2037, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....JpnY15000M Senior Unsecured Regular Bond/Debenture Jul 19, 2012, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$1250M 8.25% Senior Unsecured Regular Bond/Debenture Sep 15, 2030, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....JpnY15000M 2.11% Senior Unsecured Regular Bond/Debenture Jul 19, 2012, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR2000M 5.125% Senior Unsecured Regular Bond/Debenture Feb 14, 2013, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR500M 5.875% Senior Unsecured Regular Bond/Debenture Feb 14, 2033, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....US$10000M Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1; Placed Under Review for further Possible Downgrade

..Issuer: Telefonica Finance USA LLC

....EUR2000M Pref. Stock Preferred Stock, Downgraded to Ba1 from Baa3; Placed Under Review for further Possible Downgrade

..Issuer: Telefonica S.A.

....EUR350M Senior Unsecured Bank Credit Facility Apr 21, 2017, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR350M Senior Unsecured Bank Credit Facility Apr 21, 2015, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

....EUR30M 0% Senior Unsecured Regular Bond/Debenture Jul 21, 2029, Downgraded to Baa2 from Baa1; Placed Under Review for further Possible Downgrade

On Review for Possible Downgrade:

..Issuer: Telefonica Emisiones S.A.U.

....EUR40000M Multiple Seniority Medium-Term Note Program, Placed on Review for Possible Downgrade, currently (P)Baa2

..Issuer: Telefonica Europe B.V.

....EUR3000M Senior Unsecured Commercial Paper, Placed on Review for Possible Downgrade, currently P-2

..Issuer: Telefonica S.A.

.... Commercial Paper, Placed on Review for Possible Downgrade, currently P-2

Outlook Actions:

..Issuer: Telefonica Finance USA LLC

....Outlook, Changed To Rating Under Review From Negative

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.

Telefonica S.A. is the leading integrated telecommunications provider in Spain, delivering a full range of services and products including telephony, data exchange, interactive content and information and communications technology solutions. Telefonica is also one of the world's leading telecommunications carriers, with some 264.3 million customers worldwide (excluding Spain). As of March 2012, approximately 75% of group revenues and 77% of group EBITDA were generated outside Spain.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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 Telefonica to Baa2; ratings remain on review for further downgrade
No Related Data.

 

© 2014 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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