Moody's downgrades OTE's ratings to B3, on review for further downgrade
Global Credit Research - 24 May 2012
Madrid, May 24, 2012 -- Moody's Investors Service has today downgraded to B3 from B2 the corporate family rating (CFR) and probability of default rating (PDR) of Hellenic Telecommunications Organisation S.A. (OTE), Greece's incumbent telecom operator. Concurrently, Moody's has also downgraded to B3 from B2 the senior unsecured ratings on the global medium-term notes (GMTN) and global bonds issued by OTE PLC (OTE's fully and unconditionally guaranteed subsidiary).
In addition, Moody's has placed all the long-term ratings on review for further downgrade. For a full list of affected ratings, please refer to the list towards the end of this release.
RATINGS RATIONALE
"Today's one-notch downgrade of OTE reflects Moody's increasing concerns about OTE's ability to service its debt given (i) the potential for further economic deterioration in Greece; (ii) the resulting implications for the Greek government's ability to satisfy the conditions attached to external support; and (iii) the increased likelihood of a further, disorderly, default and possibly even of Greece exiting the euro, all of which increase the uncertainty surrounding OTE's ability to continue to service its debt under such circumstances," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for OTE. "This uncertainty persists despite management's very strong commitment to preventing a default, and the practical steps the company is implementing to mitigate the risk. In particular, potentially severe disruptions in the country's financial and banking system could have adverse implications for OTE's liquidity and cash collection," adds Mr Winzer.
Although Greece's exit from the euro area is not Moody's central scenario, the rating agency believes that, should it occur, the risk of OTE being forced to default on some of its debt would be exacerbated by the risk of a redenomination of the country's currency, as well as by a potential freeze in foreign currency exchanges. In addition, a scenario in which OTE's revenues are in a weak new domestic currency while part of its debt is in euros would create a significant additional challenge for the company. Moody's previously published views on the increased probability of Greece exiting the euro area can be accessed here:
http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_142055.
However, more positively, Moody's also recognises the outstanding corporate restructuring process that OTE has in place, which has contributed to (i) OTE's more recent EBITDA margin improvement; (ii) the strengthening of the company's cash flow; (iii) slight deleveraging; and (iv) some improvement in operating performance trends, as demonstrated during Q1 2012.
OTE's B3 rating continues to reflect the company's underlying business risk, given that it operates in a very challenging market, in which revenues remain under pressure due to a contraction in consumer spending and tough competition. Moody's expects OTE's operating performance to continue to be affected by adverse macroeconomic conditions in Greece, intense competition across all segments and the increasing challenge the company faces to further reduce costs while its revenues remain under pressure. However, the rating agency believes that these factors will be mitigated by (i) the company's strong market positions in both domestic fixed-line and mobile services; (ii) a degree of international diversification, which contributes to the company's growth outside of Greece; (iii) quality of management, which has enabled the company to cut operational expenditure to offset pressure on revenues and contain further erosion of its EBITDA margin; and (iv) the ongoing implicit support from its largest shareholder, Deutsche Telekom (rated Baa1/stable).
As part of the review of OTE for further downgrade, Moody's will assess the outcome of the 17 June general election in Greece and the country's ability to form a new government. Moody's believes that this might provide some further clarity on the political situation in Greece as well as the likelihood of the country remaining in the euro area. Nevertheless, the downgrade of OTE to B3 also reflects that the Greek economy could remain vulnerable to political events for the foreseeable future, even if the elections results remove the near-term risk of an exit from the euro area.
The review for downgrade will also include an updated assessment of the level of implicit support that OTE will receive from Deutsche Telekom given the rapidly changing circumstances in Greece. Up until now, Moody's has factored into OTE's overall rating a one-notch uplift for substantial implied support from Deutsche Telekom.
Although OTE has sufficient liquidity to cover its refinancing requirements throughout 2012 and up until mid-2013, Moody's notes that OTE has debt maturities of approximately EUR1.2 billion coming due in August 2013. The company will be increasingly challenged to meet these debt repayments despite (i) its ongoing negotiations with its banks over the extension of its loans; (ii) its efforts to effect the disposal of additional assets to raise cash in order to reduce debt; and (iii) a reduction in its working capital needs.
WHAT COULD CHANGE THE RATING UP/DOWN
In the absence of a more explicit statement of support from Deutsche Telekom, Moody's currently expects no upward pressure on OTE's ratings in the short term, as reflected in the review for further downgrade. However, positive pressure on the ratings could develop over time if the macroeconomic environment in Greece were to improve such that (i) Moody's perceives that it would favourably affect OTE's operating performance on a sustainable basis; (ii) the company's free cash flow is sufficient to allow at least a stabilisation of credit metrics and steady deleveraging; and (iii) concerns over the impact on OTE of a euro exit by Greece are mitigated.
Further negative pressure on OTE's ratings could arise if (i) conditions in the domestic environment were to deteriorate further as a result of a disorderly default of Greek banks or Greece exiting the euro area; and/or (ii) the company were to prove unable to renegotiate an extension of its loans, leading to pressure being exerted on its liquidity.
LIST OF AFFECTED RATINGS
==Debt List Start (as of 23 May 2012, 4:01:00 PM - this line removed at Release)==
Downgrades:
..Issuer: Hellenic Telecommunications Organization S.A.
.... Probability of Default Rating, Downgraded to B3 from B2
.... Corporate Family Rating, Downgraded to B3 from B2
..Issuer: OTE PLC
....Senior Unsecured Medium-Term Note Program, Downgraded to (P)B3 from (P)B2
....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 from B2
Outlook Actions:
..Issuer: Hellenic Telecommunications Organization S.A.
....Outlook, Changed To Rating Under Review From Negative
..Issuer: OTE PLC
....Outlook, Changed To Rating Under Review From Negative
==Debt List End (as of 23 May 2012, 4:01:00 PM - this line removed at Release)==
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