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Telecom Italia Joins Fiat, Portugal Telecom Rated Junk

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Telecom Italia Logo Seen on a Public Payphone
Telecom Italia’s downgrade is also a blow for Telefonica SA, the shareholder who last month increased its stake in the holding company that controls Telecom Italia’s board. Photographer: Marc Hill/Bloomberg

Oct. 9 (Bloomberg) -- Telecom Italia SpA, the phone company that lost its chief executive officer last week after a clash with shareholders over how to pare debt, had its rating cut to junk status by Moody’s Investors Service.

The one-level reduction to Ba1 strips Telecom Italia of its investment-grade ranking for the first time since ratings started last decade on its debt -- which at $39 billion is more than double its market value. The cut also puts the carrier in the same league as Portugal Telecom SGPS SA and carmaker Fiat SpA.

Explaining its decision late yesterday, Moody’s analyst Carlos Winzer cited uncertainty over Telecom Italia’s ability to strengthen its balance sheet sufficiently to offset a decline in revenue and earnings in its domestic market -- one of Europe’s most hurt by the debt crisis as consumers canceled phone subscriptions or looked for bargains. Standard & Poor’s said this week a cut to junk is “the more likely outcome” when it completes its own review by the end of November.

“Junk level is a very bad news for Telecom Italia and the company doesn’t have a clear strategy for the future,” Andrea Giuricin, a media and telecommunications analyst at Milan Bicocca University, said in a phone interview. “After the downgrade the Italian government may decide to insist on enforcing its so-called golden power.”

Brazil Dispute

Telecommunications and airlines are considered strategic industries by Prime Minister Enrico Letta’s five-month-old administration. The government has signed a decree giving the state a say in any sale of fixed-line network to a foreign buyer. It is also pushing for a state-controlled company to invest in Alitalia SpA and ease a combination with Air France-KLM Group or another airline, people familiar with the matter said this week.

Other Italian companies that are rated junk include Fiat, which lost its investment grade in 2009 and whose most recent Ba3 rating by Moody’s is three levels into junk. Aerospace and defense company Finmeccanica SpA was stripped of its investment grade this year.

Telecom Italia’s downgrade is also a blow for Telefonica SA, the shareholder who last month increased its stake in the holding company that controls Telecom Italia’s board. Telefonica is in favor of a sale of Telecom Italia’s Brazilian unit Tim Participacoes SA for cash, people familiar with the matter have said. Franco Bernabe, who had been against a sale of Latin American assets and preferred a capital increase and a spinoff of Telecom Italia’s fixed-line network, quit on Oct. 3.

Credit-Default Swaps

Credit-default swaps on Telecom Italia rose to an 11-month high of 399 basis points on Aug. 5 from 248 basis points in May and now cost 370 basis points, Bloomberg data show. 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 1.7 percent 61 cents at 9:06 a.m. in Milan, valuing the company at 11 billion euros. The stock is down 11 percent this year, headed for its ninth consecutive annual decline. Under Bernabe’s near six-year tenure as CEO, Telecom Italia has lost about $40 billion in market value. The company has also reported writedowns totaling about $19 billion since 2011.

Financially ‘Solid’

In a statement, Telecom Italia said that it is “solid both industrially and financially,” citing its cash-flow generation of 32 billion euros in the last 5 years. “Deleverage has always been, and will continue to be, a priority,” it said.

A Telefonica representative declined to comment.

Speaking to analysts Aug. 2, Chief Financial Officer Piergiorgio Peluso said there is a risk of repayment of loans Telecom Italia owes to the European Investment Bank in the event of a downgrade and if the carrier can’t reach an agreement on additional guarantees or a revision of the price.

Telecom Italia will have trouble meeting its full-year earnings targets because of Italy’s economic weakness, unemployment and the effects of tougher regulation and competition, Moody’s said yesterday.

The company cut its profit forecast in August, saying it expected a mid-single-digit percent decline from 2012, down from an earlier forecast of low single digits. Second-quarter revenue in Italy, where it competes with Vodafone Group Plc and VimpelCom Ltd.’s Wind unit, slumped 10 percent as earnings before interest, taxes, depreciation and amortization fell 13 percent. Telecom Italia is relying on growth in Brazil and Argentina to offset the decline.

Marco Patuano, who was put in charge of the company after Bernabe’s resignation, plans to propose turnaround measures to the board next month, probably including recommendations on the future of Telecom Italia’s Latin American assets.

“It’s really a question of how long they stay junk rated and whether they can sell Tim Brazil or not,” Robin Bienenstock, a London-based analyst with Sanford C. Bernstein, said after Moody’s downgrade.

To contact the reporter on this story: Daniele Lepido in Milan at dlepido1@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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