A cut in Spain's credit rating could trigger another decline for Telefónica as well, according to Moody's Investors Service. Such a move would put further pressure on the telecoms giant, which is already grappling with a €57 billion debt burden and falling profits.
Carlos Winzer, senior vice president at Moody's, told Bloomberg that a downgrade would push Telefónica's annual interest cost up by more than €500 million.
"Capital markets still perceive Telefónica as a Spanish company holding the sovereign risk," said Winzer, who is based in Madrid. "The exposure to Spain remains substantial in terms of cash flow, while its tight relationship with local banks through loans and customers' bills doesn't help either."
A cut to Spain's credit rating would mean that Telefónica's interest rate could jump from about 5 per cent to more than 6 per cent, said Winzer. The company's annual net financing costs would rise to about €3.4 billion by the end of next year, up from €2.9 billion in 2011, added Winzer, who has been the lead Telefónica analyst at Moody's for 20 years.
Last month, Moody's cut the operator's credit rating three levels to Baa3, one step above junk. Last week, the ratings firm downgraded 28 Spanish banks because of the country's sovereign debt and worsening property loans.
Nicolas Gouju, a fund manager at Groupama Asset Management in Paris, said that a downgrading of Spain's credit rating will happen by the end of the year unless there is a big European intervention and so corporate bonds will suffer, especially Telefónica's.
A downgrade could make it too costly for Telefónica to continue issuing bonds, "which could put the mid-term financial stability of the company at serious risk," Gouju said.
Adding further gloom, a BoAML credit analyst told Reuters: "While Spain's and Spanish corporates' ratings are not yet on the precipice of junk, momentum is clearly negative."
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