Telecom Italia Cut to Junk by S&P After Moody’s Downgrade

Telecom Italia SpA had its rating cut to junk by Standard & Poor’s, which said Italy’s biggest phone company is unlikely to reduce debt fast enough to offset declining earnings.

The ranking was lowered by one step to BB+ from BBB-, with a negative outlook, S&P said yesterday. Moody’s Investors Service last month stripped Telecom Italia of its investment grade after the resignation of Executive Chairman Franco Bernabe. The carrier, struggling for years to pare its debt pile, reported adjusted net debt of $38 billion as of Sept. 30.

S&P’s vote of no confidence is a setback for new Chief Executive Officer Marco Patuano, who last week unveiled plans to raise 4 billion euros ($5.4 billion) by selling assets and a mandatory convertible bond. Yesterday Milan-based Telecom Italia agreed to sell its Argentine business to Mexican financier David Martinez in a $960 million transaction.

“It will take time for the group’s revised strategic guidelines to translate into significantly improved domestic performances, and we still perceive uncertainties in the group’s governance,” S&P said in its statement.

After the downgrades, Telecom Italia, whose biggest shareholder is Spain’s Telefonica SA, is in the same league as Portugal Telecom SGPS SA and carmaker Fiat SpA.

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.

Forced Sellling?

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. They fell 5.9 percent to 299 basis points at 8:07 a.m. in London, Bloomberg data show.

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.

“As they exit investment-grade indices, bonds are likely to fall further, in particular Yankee ones, given the lack of familiarity in the U.S.,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at FM Capital Partners in London. “That said, most investors are already pre-positioned and most of the price action has taken place since S&P placed the name on negative watch.”

The shares fell 0.2 percent to 67.1 cents in Milan, valuing the company at 12.3 billion euros. They have lost 1.8 percent this year after eight straight annual declines.

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