Moody's cuts Telecom Italia to 'junk' status

Moody's on Wednesday said it has downgraded Telecom Italia's credit ratings by one notch to Ba1 from Ba3, realising the fears of former CEO Franco Bernabe by classifying the Italian operator's bonds as "junk."

The move means that Telecom Italia has lost its investment-grade status, making it more expensive to borrow money. Standard and Poor's also said on Monday that it had placed Telecom Italia's ratings on "creditwatch negative" for a possible downgrade to junk status, citing rising management and governance concerns.

Moody's said its rating action follows the company's failure to strengthen its balance sheet and the resignation of Bernabe last week.

"We are downgrading Telecom Italia's ratings primarily because the recent resignation of the CEO has increased uncertainty regarding the company's ability to strengthen its balance sheet sufficiently to mitigate the declining trend in its domestic revenues and EBITDA,"  Carlos Winzer, a Moody's senior vice president and lead analyst for Telecom Italia, said in a statement.

Moody's placed Telecom Italia's ratings on review for downgrade on Aug. 8, driven primarily by the deterioration in its domestic revenues and EBITDA resulting from the worsening economy, higher unemployment, adverse regulatory effects and more intense competition in Italy.

The resignation of Bernabe came as the last straw. Moody's said this reflects a lack of support from shareholders "for a material capital increase" to strengthen the company's balance sheet.

Indeed, Bernabe had favoured a capital-raising exercise to as a measure to reduce Telecom Italia's almost €29 billion ($39.2 billion) in debt, and said quick action was required to avoid the company's debt falling into junk territory.

However, Telefónica is believed to prefer the route of asset sales, with some recent reports suggesting it could potentially seek to break up Telecom Italia's Brazilian business. Telefónica recently formed an agreement with core Italian shareholders to strengthen its hold of Telco, which owns 22.4 per cent of Telecom Italia, and is therefore set to have a greater say over the Italian operator's strategy in future.

Moody's observed that the remaining options to strengthen Telecom Italia's credit, whether related to capital or operating plans, regulation, financial strategy or asset sales, will take time to implement, even if they are successful.

There will be uncertainty and implementation risk until the new CEO has appraised its options, set out and started to deliver on a new strategy, and this is reflected in the negative outlook, the ratings agency added.

The pressure is certainly building for new CEO Marco Patuano, who is due to present a new business plan for the company on Nov. 7. According to Reuters, Patuano told a meeting with unions on Friday that Telecom Italia had put on hold a plan to spin off its fixed-line network because the right regulatory conditions were not in place.

Vodafone also this week refuted speculation it was interested in bidding for Telecom Italia's Brazilian unit, Tim Participacoes SA, according to Bloomberg, which cited an unnamed source.

In other reports, unnamed sources told Reuters that Egyptian tycoon Naguib Sawiris has increased his short position in Telecom Italia in the expectation that Telefónica would find it difficult to sell Tim Participacoes in time to avoid a capital raising. Sawiris unsuccessfully attempted to buy a €3 billion stake in Telecom Italia last year.

For more:
- see this Moody's statement
- see this Reuters article
- see this separate Reuters article
- see this Bloomberg article
- see this separate Bloomberg article

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