Telecom Italia Debt Rating Lowered by Moody’s on Earnings

Telecom Italia SpA had its credit rating cut to the lowest investment grade by Moody’s Investors Service as Italy’s biggest phone company faces declining domestic profitability and failed to reach its debt-reduction target.

Telecom Italia’s senior unsecured and issuer ratings were lowered one level from Baa2, Moody’s said in a statement yesterday. The rating may be cut again, echoing the tough operating environment in Italy, Moody’s said.

“The downgrade reflects the increased risks to its business from the challenging operating environment in its key domestic market,” Carlos Winzer, Moody’s senior vice president and lead analyst for Telecom Italia, said in the statement. “Although management is taking actions, such as the cut in dividends and plan to issue hybrid bonds, this is not sufficient to fully offset the company’s increased business risk.”

Telecom Italia last week forecast declining 2013 earnings after reporting profit that trailed analysts’ estimates. Adjusted net debt will fall to less than 27 billion euros in 2013 ($36 billion) from 28.3 billion euros at the end of 2012 and 29.5 billion euros at the end of September, the company said. Milan-based Telecom Italia had predicted debt would fall to about 27.5 billion euros at the end of 2012.

The cost of insuring Telecom Italia bonds using credit-default swaps jumped by more than 31 basis points, or 9.7 percent, to 358 basis points following the cut, data compiled by Bloomberg show. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

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