Brexit Makes It Tougher for Telefonica to Avoid a Downgrade

  • Carrier must come up with clear deleveraging plan by year end
  • Moody’s analyst Carlos Winzer comments on Telefonica debt plan

Telefonica SA, facing road-bumps in a plan to raise cash from its British unit following the Brexit vote, risks having its credit rating cut if the carrier doesn’t come up with a clear way to cut debt by year end, according to Moody’s Corp.

“Telefonica’s Baa2 rating could be downgraded without clear evidence of progress made by the company toward deleveraging this calendar year, with the expectation of full deleveraging by the second half of 2017,” Moody’s analyst Carlos Winzer said in a phone interview. Telefonica, which has been working on plans to reduce its debt since last year, faces additional challenges to do so following last week’s referendum in the U.K., he said.

On June 24 -- the day after the U.K. vote -- officials at Spain’s biggest phone company met with financial advisers to discuss options for its O2 unit and the possible initial public offering of a stake in infrastructure unit Telxius. While Telefonica hasn’t publicly stated what plans it has for O2, people familiar with the matter had previously said it is considering raising funds either by listing shares or selling a stake in the unit. Those people also said that Telefonica would list part of Telxius in July.

A spokesman for Telefonica declined to comment on the plans.

Telefonica rose 2.9 percent to 7.89 euros in mid-morning Madrid trading. The shares have fallen 23 percent this year, compared to a 12 percent drop for the Bloomberg Intelligence European Telco Carriers Competitive Peers index.

Telefonica needs to raise about 14 billion euros ($15.4 billion) to achieve its target of a ratio for reported net debt to earnings before interest, taxes, depreciation and amortization of 2.35, according to Winzer. Telefonica’s target would be equal to Moody’s estimated net adjusted debt to Ebitda of around 3 over the next 18 months, Winzer said.

Moody’s thinks Telefonica’s “management continues to be committed to the deleveraging plan" and to achieving the targets, Winzer said.

Moody’s on May 12 placed Telefonica’s rating outlook on negative watch, while it maintained a Baa2 rating, two grades above junk level, for the carrier. The company is rated by BBB by S&P Global Ratings, also two grades above junk. Earlier this month, the carrier’s debt was among the first acquired by the European Central Bank as part of its corporate bond acquisition program.

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