Madrid, May 25, 2012 -- Moody's Investors Service has today placed on review for downgrade
the Baa1 senior unsecured and long-term issuer ratings of Telefónica
SA as well as its Prime-2 (P-2) short-term rating.
Concurrently, Moody's has also placed on review for downgrade
the ratings of all of Telefónica's guaranteed subsidiaries
and the national scale ratings of Telefónica Finanzas México,
SA de CV.
RATINGS RATIONALE
"The review for downgrade on Telefónica's ratings reflects
(1) our increasing concerns about the company's revenues,
margin, operating cash flow and speed of deleveraging in an increasingly
challenging environment in Spain; and (2) a possible further slowdown
in some of the company's international operations,"
says Carlos Winzer, a Moody's Senior Vice President and lead
analyst for Telefónica.
"The domestic macroeconomic environment, regulation and the
impact of the contraction in consumer spending will most likely translate
into further pressure on Telefónica's revenues and cash flow,"
explains Mr Winzer. "Although Telefónica has taken
decisive measures to mitigate the effects of the challenging operating
environment in Spain -- including a substantial shareholder
remuneration cut in 2012, the sale of some non-strategic
assets, as well as commercially enhancing initiatives and operating
expenditure reductions -- we believe the group's operating
cash flow will continue to face continued pressure. This could
challenge the group's ability to improve its credit metrics in order
to achieve a level commensurate with the current ratings."
Moody's expects Telefónica's weak performance,
as evidenced by its Q1 operating results, to continue in Q2 2012,
albeit with the possibility of a slight improvement during the second
half of the year.
During the review process, Moody's will assess the likelihood
of Telefónica strengthening its financial ratios in the short term
in order to stay within the rating agency's recommended ratio levels
for the current rating. Additionally, Moody's will
evaluate the group's progress with the disposal of assets in order
to provide the headroom required to (1) absorb the increased competitive
and regulatory pressures in Spain, (2) mitigate weaker domestic
consumer and business revenues, and (3) offset softer growth than
anticipated in its international operations.
In particular, Moody's is concerned about the combination
of a number of factors, including (1) the very negative evolution
of, and weak prospects for, Telefónica's Spanish
business; (2) the group's weak UK operations; and (3)
uncertain growth prospects in Brazil. Moreover, additional
strategic challenges could arise from the expected increased intensity
in the competitive environment in Germany. At this point,
Moody's expects a maximum one-notch downgrade to result from
the review process.
Moody's acknowledges Telefónica's large size and scale,
and the diversification benefits associated with its strong positions
in many different markets. The current Baa1 ratings reflect management's
track record and ability to execute a well-defined and concise
strategy; as well as its focus on preserving stable cash flow generation
and a strong credit profile through a balanced approach between shareholder
remuneration and bondholder protection. This strategy includes
management's stated commitment to maintain its reported net debt/EBITDA
below 2.35x.
From a liquidity risk management perspective, Moody's believes
Telefónica is effectively managing its upcoming maturities.
The group has already refinanced all of its debt maturing in 2012 and
40% of its debt maturing in 2013. At the end of March 2012,
Telefónica had around EUR5 billion in cash and cash equivalents.
The group's external liquidity sources include EUR8.5 billion
of committed long-term bank facilities, which were undrawn
as of March 2012, and can be drawn at any time, as these facilities
are not subject to material adverse change (MAC) clauses or financial
covenants.
WHAT COULD CHANGE THE RATING UP/DOWN
Prior to the review process, Moody's had indicated that downward
pressure on the ratings could arise if Telefónica were to deviate
from its financial ratio strengthening plan because of (1) operating underperformance;
(2) weaker cash flow generation; or (3) the assumption of further
substantial debt in conjunction with the pursuit of acquisitions or more
aggressive shareholder distribution policies. More specifically,
the rating could come under negative pressure if the group's credit
protection metrics were to weaken, reflected by a retained cash
flow (RCF)/net adjusted debt ratio of less than 18% and a net adjusted
debt/EBITDA ratio that fails to gradually improve towards 2.5x
within the next 12-18 months.
In view of today's action, Moody's does not currently
anticipate upward rating pressure. Prior to the review process,
Moody's had indicated that the outlook on the Baa1 ratings could
revert to stable if there were a sustainable improvement in Telefónica's
credit metrics, reflected by an RCF/net adjusted debt ratio that
is above 20% and a net adjusted debt/EBITDA ratio that is below
2.5x. A rating upgrade to A3 would require a significant
strengthening of Telefónica's debt protection ratios as a
result of improvements in its operational cash flows and a further reduction
in debt. Moody's does not currently envisage such improvements
over the next 24 months.
Moody's maintains the following ratings on Telefónica and
its affiliates as follows:
On Review for Possible Downgrade:
..Issuer: Telefonica Emisiones S.A.U.
....Multiple Seniority Medium-Term
Note Program, Placed on Review for Possible Downgrade, currently
(P)Baa1
....Senior Unsecured Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently Baa1
..Issuer: Telefonica Europe B.V.
....Multiple Seniority Medium-Term
Note Program, Placed on Review for Possible Downgrade, currently
(P)Baa1
....Senior Unsecured Bank Credit Facility,
Placed on Review for Possible Downgrade, currently Baa1
....Senior Unsecured Commercial Paper,
Placed on Review for Possible Downgrade, currently P-2
....Senior Unsecured Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently Baa1
....Senior Unsecured Shelf, Placed on
Review for Possible Downgrade, currently (P)Baa1
..Issuer: Telefonica Finanzas Mexico, S.A.
de C.V.
....Senior Unsecured Medium-Term Note
Program, Placed on Review for Possible Downgrade, currently
Aa1.mx
..Issuer: Telefonica S.A.
.... Commercial Paper, Placed on Review
for Possible Downgrade, currently P-2
....Senior Unsecured Bank Credit Facility,
Placed on Review for Possible Downgrade, currently Baa1
....Senior Unsecured Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently Baa1
Outlook Actions:
..Issuer: Telefonica Finanzas Mexico, S.A.
de C.V.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Telefonica S.A.
....Outlook, Changed To Rating Under
Review From Negative
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.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".mx"
for Mexico. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Methodology published
in March 2011 entitled "Mapping Moody's National Scale Ratings to
Global Scale Ratings".
Telefónica SA 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. Telefónica is one
of the world's leading telecommunications carriers, with some
264.3 million customers worldwide (excluding Spain). The
group is the leading operator in Brazil, Argentina, Chile
and Peru and has substantial operations in Colombia, Ecuador,
El Salvador, Guatemala, Mexico, Nicaragua, Panama,
Uruguay and Venezuela. In addition to its historical presence in
Latin America, Telefónica also has a strong footprint in
the UK, Germany, Ireland and the Czech Republic, providing
services to more than 58.9 million customers as of the end of March
2012. As of March 2012, 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 reviews.
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.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
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
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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
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Moody's places Baa1 ratings of Telefonica SA on review for downgrade
