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Rating Action:

Moody's places Ba2 ratings of Portugal Telecom on review for upgrade

Global Credit Research - 03 Oct 2013

Madrid, October 03, 2013 -- Moody's Investors Service has today placed on review for upgrade the Ba2 corporate family rating (CFR), the Ba2-PD probability of default rating (PDR) and the Ba2 senior unsecured long-term debt ratings of Portugal Telecom SGPS, S.A. Concurrently, Moody's has placed on review for upgrade the Ba2 ratings of Portugal Telecom's fully owned subsidiary, Portugal Telecom International Finance B.V. ("PTIF").

The rating action is triggered by Portugal Telecom's announced proposal that it will combine its business with Oi S.A. (Baa3 negative; see separate PR), forming a new corporate structure (CorpCo). The new combined entity will benefit from a minimum BRL 7 billion (EUR 2.3 billion) to as much as BRL 8 billion (EUR 2.7 billion) capital increase and a shareholder restructuring at Oi.

"We are putting Portugal Telecom's ratings on review for upgrade because if the corporate combination is successfully executed, the company's bondholders could benefit from an explicit guarantee from Oi," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Portugal Telecom. "The combination would also likely benefit Portugal Telecom in terms of synergies and stronger international diversification, and it would become part of a larger group with greater financial strength. In addition, a guarantee from Oi could mitigate Portugal Telecom's exposure to domestic Portuguese sovereign and macroeconomic risks," adds Mr Winzer.

The proposed transaction is subject to the successful completion of the capital increase by Oi, shareholder and regulatory approvals in Portugal and Brazil and is not expected to close before June 2014.

RATINGS RATIONALE

The rating review was prompted by Moody's expectation that if Portugal Telecom's announced intention to combine with Oi is successfully executed, Portugal Telecom's bondholders could benefit from an explicit guarantee from Oi. Under the terms of the transaction being proposed, Portugal Telecom bondholders will have the option of either being paid at closing or redeeming their existing bonds into newly issued bonds, which will rank pari passu with the existing debt of Oi.

The new combined entity will use the capital increase of up to EUR2.7 billion equivalent (BRL8 billion) to reduce existing debt both at the holding company level as well as at the operating company level.

Because of the guarantee to be issued by Oi, Moody's could upgrade Portugal Telecom's instrument ratings by up to two notches to the level of Oi's rating after the transaction closes and assuming all proposed terms and conditions are met. To the extent that, on completion of the transaction, the new issuing entity is not Portugal Telecom, and if a separate rating for Portugal Telecom is no longer appropiate, then Moody's may ultimately withdraw Portugal Telecom's corporate family and probability of default ratings.

From a liquidity risk management perspective, Moody's continues to monitor Portugal Telecom's refinancing plans beyond 2017. The telecoms operator has no need to issue more debt in the near term and will only do so to take advantage of opportunities that may arise in the market. In Moody's view, internal sources and availability under long-term committed lines of credit should enable Portugal Telecom to cover its debt maturities of approximately EUR1.0 billion over the next 18 months and other expected cash demands over this period. As of June 2013, Portugal Telecom's cash in Portugal amounted to EUR2.6 billion. In addition, the company has EUR900 million of undrawn committed commercial paper and syndicated standby facilities.

Portugal Telecom's rating reflects the business risk that the company is facing despite (1) its relatively resilient, albeit highly competitive, underlying business, particularly in the fixed-line segment; (2) its leading market positions; (3) its international diversification; (4) management's track record of executing the company's strategy under adverse circumstances; (5) high-quality infrastructure, which will support Portugal Telecom's revenues in the future and help to partially mitigate the negative effects of the weak macroeconomic environment in Portugal; and (6) the company's strong liquidity profile, with pre-funded cash needs until the end of 2017.

However, whilst Moody's acknowledges Portugal Telecom's business and geographical diversification, quality of execution and strong liquidity profile, the rating also takes into account the company's limited ability to isolate itself from (1) stresses in the debt market for Portuguese issuers; and (2) local economic and regulatory circumstances, which could worsen as a result of pressures on the sovereign. Portugal Telecom's rating is weakly positioned and evidence of a sustainable improvement in credit metrics is required to preserve the rating.

The rating review will focus on the execution of the proposed transaction.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade the ratings if Portugal Telecom benefits from an explicit guarantee from Oi following the completion of the proposed corporate combination. In addition, upward rating pressure could result if the rating agency perceives a material improvement in the overall macroeconomic and market conditions in Portugal, supported by improving consumer trends and a more benign competitive environment. Such an improvement would likely reduce pressure on Portugal Telecom's revenues. Furthermore, Moody's could upgrade the ratings if Portugal Telecom reduces its debt and improves its credit metrics and overall operating performance on a sustainable basis, such that its adjusted net leverage trends comfortably towards 2.5x and below.

Conversely, Moody's would consider downgrading Portugal Telecom's ratings if the proposed transaction did not close and there were signs that the company's liquidity was becoming constrained and that it might not meet its medium-term funding needs, or if the company's performance were to deteriorate beyond current expectations. Specifically, a downgrade could occur if, for example, (1) Portugal Telecom fails to reduce debt and its credit metrics deteriorate, such that its adjusted net leverage trends towards 3.5x over the next couple of years with no expected improvement; or (2) the company's adjusted retained cash flow (RCF)/net debt deteriorates towards 15%. Furthermore, Moody's could consider downgrading Portugal Telecom's ratings in the event of any further deterioration in the sovereign and broader macroeconomic environment in Portugal.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings 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. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Domiciled in Lisbon, Portugal Telecom is the leading telecommunications operator in Portugal, servicing 5.2 million fixed lines, which includes one million ADSL retail connections. In addition, the operator had approximately 7.7 million mobile phone customers in Portugal as of June 2013. Furthermore, Portugal Telecom has operations in other countries, including Brazil, Cape Verde, East Timor, Angola, Sao Tome and Principe and Namibia. The company's annual revenues amounted to EUR6.3 billion and reported EBITDA to EUR2.1 billion for the 12-month period to June 2013.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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 places Ba2 ratings of Portugal Telecom on review for upgrade
No Related Data.

 

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