Moody's downgrades France Telecom over growing competition threats

Credit rating agency Moody's has downgraded its outlook on France Telecom (FT) to negative from stable.

Moody's claims FT's operating performance might be impacted by the increasingly competitive nature of the French mobile and fixed markets, telecoms regulation and the increasing difficulty experienced by the company in executing operating expense cuts, despite the efforts of the company's management.

The rating agency points to FT's recent quarterly performance that suggests a more challenging operating environment is developing, particularly for the domestic market, where the operator suffered a 4.5 per cent fall in revenues and 9 per cent decline in EBITDA in the first half of 2012 compared to the same period last year.

Carlos Winzer, Moody's vice president and lead analyst for FT, said: "Today's announcement reflects our concern that, in the absence of corrective measures, deteriorating cash flow as a result of competitive and regulatory pressures could impair France Telecom's ability to sustain adjusted financial ratios such as adjusted net debt/EBITDA ratio below 2.5x and adjusted retained cash flow/net debt ratio above 20 per cent, in line with the current A3 rating level."

Of note, Moody's says that FT has no real cushion to absorb any increased competitive and regulatory pressures. or weaker domestic consumer and business revenues.

As against recent statement by FT CEO Stephane Richard that he would be interested in acquiring business with the right profile, Moody's warns that it could downgrade the company again if it embarks of an aggressive expansion or acquisition programme (most likely outside of its existing footprint), leading to higher financial, business and execution risk.

For more:
- see this Finanzen article
- see this Capital article (translated via Google Translate)

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