France Telecom Debt Rating Cut by S&P as Mobile Bills Shrink
France Telecom SA (FTE) had its debt rating cut one step by Standard & Poor’s, which cited pricing pressure in the French wireless market and a bigger-than- anticipated decline in earnings this year.
The long-term rating was reduced to BBB+, the third-lowest investment grade, while the outlook is stable, S&P said in a statement today. Moody’s Investors Service, which ranks the debt one step higher at A3, said April 10 it may cut its rating. France Telecom reported net debt of 30.5 billion euros ($39.7 billion) as of the end of 2012.
The change reflects expectations that Paris-based France Telecom’s earnings before interest, taxes, depreciation and amortization “will decline more in 2013 than we previously expected, due to mounting competitive and price pressures since late last year in the French mobile market and slowdowns in the group’s key European markets since second half of 2012,” especially in Poland, S&P said in its statement.
Credit-default swaps insuring France Telecom’s debt for five years climbed 1.8 percent to 117 basis points, signaling a deterioration in creditworthiness. 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 agreements.
Today’s cut brings France Telecom’s rating to the same level as Bonn-based Deutsche Telekom AG. (DTE) France Telecom, owner of the Orange brand, is deemed safer than competitor Telefonica SA (TEF), though it’s behind Vodafone Group Plc (VOD) based on S&P’s rating.
France Telecom’s shares gained 0.5 percent to 7.64 euros in Paris, after rising as much as 1.2 percent earlier in the day.
The former French phone monopoly, which is scheduled to report first-quarter revenue on April 24, last year cut its dividend forecast, as have other European rivals, in an effort to save cash and preserve its debt rating. The company has forecast its operating cash flow will stabilize or rebound only in 2014.
At home, the company is betting on being able to charge more for speedier mobile packages. France Telecom said in February it will work on cost cuts to help stabilize cash flow. It has to navigate rival Iliad SA (ILD)’s low-cost strategy as well as Socialist President Francois Hollande’s tough stance against firings.
Wireless tariffs in France have fallen faster since newcomer Iliad began offering monthly subscriptions starting at 2 euros last year. France Telecom, which made about 56 percent of its Ebitda from France, has been trying to diversify in faster-growing regions such as Africa.
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