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Related Issuers
Rating Action:

Moody's downgrades Telekom Slovenije to Ba1; outlook negative

05 Apr 2013

Madrid, April 05, 2013 -- Moody's Investors Service has today downgraded Telekom Slovenije d.d.'s senior unsecured rating to Ba1 (LGD4, 50%) from Baa3 and lowered the baseline credit assessment (BCA) to ba1 from baa3.

Concurrently, Moody's has assigned a Ba1 corporate family rating (CFR) and Ba1-PD probability of default rating (PDR) to the company and has withdrawn the Baa3 long-term Issuer Rating. The outlook on all ratings is negative.

RATINGS RATIONALE

"The rating downgrade reflects Telekom Slovenije's weaker liquidity profile as a result of the deterioration in the credit quality of some of the largest Slovenian banks," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for Telekom Slovenije. The rating also reflects ongoing weak operating and financial performance that is due to competitive pressures and difficult macroeconomic conditions in the company's markets.

"Most of Telekom Slovenije's EUR100 million of cash and deposits as of December 2012 are placed with domestic banks, while it also relies on domestic banks for EUR70 million in back-up liquidity. This increases the company's vulnerability to stress in the Slovenian banking sector, and we view its liquidity profile as no longer being consistent with an investment-grade rating," adds Mr. Palacios. More positively, Moody's notes that Telekom Slovenije has no capital market debt redemptions until December 2016, when its EUR300 million bond has to be repaid.

In Moody's view, the risks for depositors in some large Slovenian banks has increased, as highlighted in the recent downgrades of (1) Abanka Vipa's long-term local and foreign-currency deposit ratings to Caa3 from Caa1 on 22 February 2013; (2) Nova Ljubljanska banka's (NLB) long-term rating to Caa2 from B2 on 12 March 2013; and (3) Nova Kreditna banka Maribor's (NKBM) long-term deposit rating to Caa2 from B3 on 25 March 2013. All of these ratings carry a negative outlook. These downgrades primarily reflect the high likelihood that these banks will require further external capital assistance in order for their capital ratios to remain above minimum regulatory guidelines.

Telekom Slovenije's Ba1 CFR reflects the company's position as a leading integrated telecom provider in the Slovenian market as well as its presence in the South East Europe (SEE) region, particularly in Kosovo and Macedonia. The rating factors in the company's sluggish operating performance as a consequence of enhanced competitive and regulatory pressures and an adverse macroeconomic backdrop, which are affecting its growth prospects and operating margins. The rating also reflects the weakening liquidity in light of the company's large exposure to the Slovenian banking sector. Moody's expects that the company's financial ratios will be consistent with the Ba1 rating, with adjusted debt/EBITDA at around 2.0x and adjusted retained cash flow (RCF)/debt above 35%.

Telekom Slovenije is a government-related issuer (GRI). Its underlying credit strength is indicated by its BCA of ba1. The Ba1 CFR reflects the high default dependence between Telekom Slovenije and the Slovenian government and Moody's expectation of moderate extraordinary government support being made available if required, on account of the Republic of Slovenia's 72.4% ownership of the company. The rating does not benefit from any support uplift, as Moody's believes that following its downgrade to Baa2 (negative outlook) in August 2012, the government's ability to support Telekom Slovenije if required has reduced. This partly reflects that the potential need for support from various stakeholders may be increasing, in light of the problems facing the domestic banking sector.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook primarily reflects the potential pressures on Telekom Slovenije's liquidity profile as a result of its reliance on the domestic banking sector and the very weak credit profiles of Slovenian banks. Longer term, if access to capital markets and bank lending becomes constrained as a result of diminished investor or lender confidence, the company's liquidity profile could face further pressures. This is relevant for the company because it will have to rely on accessing capital and/or bank markets to refinance its 2016 bond upon maturity given its expected limited free cash flow generation.

The negative outlook on Telekom Slovenije's ratings also reflects the challenging macroeconomic environment in Slovenia. As Telekom Slovenije generated around 84% of its consolidated EBITDA in Slovenia in 2012, its ability to decouple from a weak economy and banking sector is very limited. The company's operating performance in Slovenia is likely to continue to be negatively impacted not only by the adverse economic environment, but also by fierce competition and tough regulation. In Moody's view, these pressures, combined with higher dividends and higher capital expenditure than in the past, are likely to result in limited free cash flow generation.

The negative outlook also reflects the uncertainties regarding the company's shareholding structure. Moody's notes that over the short to medium term, the government may consider lowering its 72.4% stake in Telekom Slovenije as part of a broader effort to (1) increase the presence of private investors in the shareholding structure of government-related entities; and (2) raise proceeds from its portfolio of state-owned companies.

WHAT COULD CHANGE THE RATING DOWN/UP

The rating could come under further pressure if (1) Telekom Slovenije's liquidity profile deteriorates significantly as a result of the company facing alternative back-up liquidity constraints or being unable to access the deposits placed with domestic banks in a timely manner; or (2) refinancing risk for the 2016 bond maturity increases; or (3) the company's financial flexibility otherwise weakens.

Telekom Slovenije's ratings could also come under downwards pressure if (1) the company's underlying operating performance were to weaken beyond current expectations as a result of macroeconomic or other considerations; or (2) the company were to incur restructuring costs, or make additional material debt-financed acquisitions, investments or cash calls as a result of litigation such that its credit metrics deteriorated (including adjusted RCF/debt sustainably below 35% and adjusted debt/EBITDA trending towards 2.25x).

Finally, a downgrade of the sovereign rating could have an impact on the rating of Telekom Slovenije.

Moody's does not currently anticipate upwards ratings pressure in light of the negative outlook, and the weak macroeconomic conditions in Slovenia. Upward rating pressure would require an improvement in the company's liquidity profile and higher visibility with regard to Telekom Slovenije's refinancing plans for the 2016 bond maturity. The development of positive pressure on Telekom Slovenije's rating will also require (1) the stabilisation of the macroeconomic and operating environment; and (2) the company to sustain credit metrics above current levels, including adjusted debt/EBITDA trending towards 1.5x, and generation of substantial positive free cash flow on a sustainable basis.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Telecommunications Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and the Government-Related Issuers methodology published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Domiciled in Ljubljana, Slovenia, Telekom Slovenije is an integrated telecommunications provider in Slovenia, with a presence in Kosovo, Albania, Macedonia, Bosnia and Herzegovina, Croatia and Gibraltar. In 2012, Telekom Slovenije reported operating revenues of EUR793 million and EBITDA of EUR242 million. The Republic of Slovenia directly and indirectly owns 72.4% of the company.

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.

Ivan Palacios
VP - Senior Credit Officer
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 Telekom Slovenije to Ba1; outlook negative
No Related Data.
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