S&P Places Telecom Italia (TI) on CreditWatch Negative, Could Cut to Junk
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Standard & Poor's Ratings Services placed its 'BBB-' long-term and 'A-3' short-term corporate credit ratings on Telecom Italia SpA (NYSE: TI) and all related issue ratings on CreditWatch with negative implications.
The CreditWatch placement follows the resignation of TI's chairman and CEO, and our perception that the group faces heightened uncertainties regarding its future strategic orientation. Furthermore, we believe TI's operating performance in 2014-2015 could suffer, and we think the company has limited levers available to accelerate debt reduction beyond organic discretionary cash flow generation. We are uncertain what action management could take to further trim debt, and what impact this may have on the group's business and financial risk profiles. We are also unaware of any additional measures management may take to stabilize the company's domestic performance. We believe this may require significant fixed or commercial outlays, and that the benefits could take a long time to materialize.
Given the company's deteriorated operating performance and management and governance uncertainties, we now consider it unlikely that TI will reduce leverage in the near team through a capital contribution, such as equity or subordinated debt with equity characteristics.
Spain-based Telefonica S.A. recently increased its ownership in TI's controlling shareholder Telco, and we understand that it may further increase its stake in the future. Telefonica owns competitors of TI units in Brazil and Argentina. While we understand that Telefonica will not participate in TI's board discussions about Latin America, we believe that its increased ownership creates further risks of a continued lack of strategic direction at TI.
We have revised our management and governance (M&G )score on TI to "fair" from "satisfactory" for the following reasons: First, we think a lack of clarity exists in the company's strategy, including continued uncertainty over a spin-off of the fixed-line network and the deployment of next generation fixed infrastructure. Second, we consider its recent earnings guidance revision to be evidence of execution issues. Furthermore, we see some weakness in the company's governance related to its shareholder structure that we believe could slow its decision-making on strategic issues. We also take into consideration the turnover in senior management. The appointment of a temporary CEO with significant experience of the company's main businesses in Italy and Latin America is an important consideration, however, which mitigates the risk of a M&G score of "weak".
We intend to resolve the CreditWatch status by the end of November, after reviewing with TI's management the group's strategic orientation and the potential implications for its business and financial risk profiles. At this stage, a one-notch rating downgrade to 'BB+' seems the more likely option, given our view that any large-scale positive credit events are unlikely in the near term. A 'BB+' rating would be compatible with our expectation that TI's adjusted debt leverage could reach about 3.4x in 2013 and 2014 and that uncertainties on its strategic direction will be resolved only gradually over the next one to two years. We could, however, affirm the rating at 'BBB-' if we considered TI likely to experience significant positive credit events in the near term. This would incorporate a sharp improvement in its deleveraging profile from organic or inorganic sources, such as a capital increase or asset disposal, combined with clarification of its long-term strategic positioning.
We would not rule out a two-notch downgrade to 'BB' if we believed a deteriorated credit profile would alter TI's access to and cost of capital, and materially affect its overall liquidity profile.
The CreditWatch placement follows the resignation of TI's chairman and CEO, and our perception that the group faces heightened uncertainties regarding its future strategic orientation. Furthermore, we believe TI's operating performance in 2014-2015 could suffer, and we think the company has limited levers available to accelerate debt reduction beyond organic discretionary cash flow generation. We are uncertain what action management could take to further trim debt, and what impact this may have on the group's business and financial risk profiles. We are also unaware of any additional measures management may take to stabilize the company's domestic performance. We believe this may require significant fixed or commercial outlays, and that the benefits could take a long time to materialize.
Given the company's deteriorated operating performance and management and governance uncertainties, we now consider it unlikely that TI will reduce leverage in the near team through a capital contribution, such as equity or subordinated debt with equity characteristics.
Spain-based Telefonica S.A. recently increased its ownership in TI's controlling shareholder Telco, and we understand that it may further increase its stake in the future. Telefonica owns competitors of TI units in Brazil and Argentina. While we understand that Telefonica will not participate in TI's board discussions about Latin America, we believe that its increased ownership creates further risks of a continued lack of strategic direction at TI.
We have revised our management and governance (M&G )score on TI to "fair" from "satisfactory" for the following reasons: First, we think a lack of clarity exists in the company's strategy, including continued uncertainty over a spin-off of the fixed-line network and the deployment of next generation fixed infrastructure. Second, we consider its recent earnings guidance revision to be evidence of execution issues. Furthermore, we see some weakness in the company's governance related to its shareholder structure that we believe could slow its decision-making on strategic issues. We also take into consideration the turnover in senior management. The appointment of a temporary CEO with significant experience of the company's main businesses in Italy and Latin America is an important consideration, however, which mitigates the risk of a M&G score of "weak".
We intend to resolve the CreditWatch status by the end of November, after reviewing with TI's management the group's strategic orientation and the potential implications for its business and financial risk profiles. At this stage, a one-notch rating downgrade to 'BB+' seems the more likely option, given our view that any large-scale positive credit events are unlikely in the near term. A 'BB+' rating would be compatible with our expectation that TI's adjusted debt leverage could reach about 3.4x in 2013 and 2014 and that uncertainties on its strategic direction will be resolved only gradually over the next one to two years. We could, however, affirm the rating at 'BBB-' if we considered TI likely to experience significant positive credit events in the near term. This would incorporate a sharp improvement in its deleveraging profile from organic or inorganic sources, such as a capital increase or asset disposal, combined with clarification of its long-term strategic positioning.
We would not rule out a two-notch downgrade to 'BB' if we believed a deteriorated credit profile would alter TI's access to and cost of capital, and materially affect its overall liquidity profile.
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