Telefonica Debt May Get Downgraded Even After Payout Move

Telefonica SA, the Spanish phone company that this week suspended its dividend, still faces a potential downgrade of its credit ratings by Moody’s Investors Service as the move isn’t enough to offset liquidity risks.

The rating on Telefonica’s long-term debt remains on review for downgrade depending on the Spanish sovereign debt situation and its effect on the Madrid-based company, Moody’s said today in a statement. Moody’s lowered the company’s rating to Baa2, the second-lowest investment grade, last month.

“A rating downgrade could arise if the sovereign rating were to be downgraded, subject to Moody’s pending assessment of whether a two notch differential between the sovereign rating and Telefonica could be considered,” Carlos Winzer, a Moody’s analyst in Madrid, said in the statement. The downgrade could also happen “if Telefonica were to deviate from its financial-ratio strengthening plan.”

Telefonica, Spain’s biggest phone company, suspended its dividend, cut a revenue forecast and slashed compensation for top executives including Chief Executive Officer Cesar Alierta in its most drastic response to Spain’s debt crisis. Moody’s said Telefonica’s move “is credit positive as it will reduce its refunding needs alleviate part of the negative pressure on credit metrics and thus on its ratings.”

Alierta is reversing the company’s expansion strategy by selling assets including shares in its German and Latin American businesses as well as non-core assets, such as call-center unit Atento. The phone operator, whose net debt climbed to 58.3 billion euros ($71.5 billion) euros at the end of June, plans to reach a net debt of less than 2.35 times operating profit before depreciation and amortization in 2012, from 2.46 last year.

Telefonica shares fell fell 0.1 percent to 8.94 euros at 12:36 p.m. Madrid time, valuing the company at 40.6 billion euros.