Telecom Italia SpA (TIT)’s debt will probably be cut to junk by Standard & Poor’s, which cited the phone company’s uncertain strategic direction after the resignation of Chief Executive Officer Franco Bernabe.
A reduction of the BBB- long-term rating, the lowest investment grade, to BB+ “appears the more likely outcome” after S&P completes a review by the end of November, it said yesterday. S&P joined Moody’s Investors Service and Fitch Ratings to signal the possibility of a downgrade for Milan-based Telecom Italia, which reported adjusted net debt of 28.8 billion euros ($39 billion) as of June 30.
Bernabe’s departure last week followed a dispute over ways to boost Telecom Italia’s finances with shareholders including Madrid-based Telefonica SA (TEF), which first bought a stake in its Italian counterpart six years ago and tightened its grip last month. A Telecom Italia board meeting on Oct. 3, which put Chief Operating Officer Marco Patuano in charge of the carrier, failed to come up with recommendations on how to reduce debt.
“S&P has just substantially weakened TI’s credit profile with this move, in our view, given two junk ratings are now considered very possible,” Roger Appleyard, head of global credit research at RBC Capital Markets in London, wrote in a note. The likelihood of Telecom Italia bonds leaving indexes weighted with only investment-grade bonds and the corresponding “forced selling is now much greater.”
Telefonica is in favor of a sale of Telecom Italia’s Brazilian unit Tim Participacoes SA (TIMP3), which has a market value of $12 billion, people familiar with the matter have said. Bernabe had been against a sale of Latin American assets and preferred a capital increase and a spinoff of Telecom Italia’s fixed-line network.
Vodafone Group Plc (VOD) isn’t interested in bidding for Tim, said a person with direct knowledge of the company, refuting speculation that the U.K. carrier might make an offer. The person asked not to be identified because the deliberations are private. Patuano plans to propose to the board Nov. 7 turnaround measures, which will likely include recommendations on the future of Telecom Italia’s Latin American assets.
The carrier “is suffering increasing management and governance weakness,” S&P said in a statement. “The group has limited possibilities of accelerating debt reduction or stabilizing its operating performance over the near term.”
A spokesman for Telecom Italia declined to comment on S&P’s statement.
Moody’s said in early August that it may cut Telecom Italia’s debt to junk. The rating company gave the carrier three months to come up with measures to strengthen its balance sheet, a person familiar with the matter said at the time. Fitch said last week Bernabe’s departure reduced the number of options for Telecom Italia because it also removed the likelihood of a large capital increase.
Credit-default swaps on Telecom Italia rose to an 11-month high of 400 basis points on Aug. 5 from 248 basis points in May and cost 356 basis points as of 5:41 p.m. in London, Bloomberg data show.
Based on yesterday’s prices, the swaps imply a B1 rating, four steps below investment grade, according to Moody’s Analytics. The derivatives pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreement and an increase signals deterioration in perceptions of credit quality.
Telecom Italia fell 1.8 percent to 61.7 cents in Milan, valuing the company at 11.3 billion euros. The stock is down 9.7 percent this year and is headed for the ninth consecutive annual decline.
Egyptian billionaire Naguib Sawiris, whose bid to acquire a stake in Telecom Italia was rebuffed by the company last year, increased his short position to about 1.2 percent of the capital, according to a regulatory filing. In September, Telecom Italia had renewed contact with Sawiris, people familiar with the matter said at the time.
To contact the reporter on this story: Daniele Lepido in Milan at email@example.com