S&P Places Telecom Italia (TI) on CreditWatch Negative, Could Cut to Junk
Standard & Poor's Ratings Services placed its 'BBB-' long-term and 'A-3' short-term corporate credit ratings on Telecom Italia SpA (NYSE: TI) and all related issue ratings on CreditWatch with negative implications.
The CreditWatch placement follows the resignation of TI's chairman and CEO, and our perception that the group faces heightened uncertainties regarding its future strategic orientation. Furthermore, we believe TI's operating performance in 2014-2015 could suffer, and we think the company has limited levers available to accelerate debt reduction beyond organic discretionary cash flow generation. We are uncertain what action management could take to further trim debt, and what impact this may have on the group's business and financial risk profiles. We are also unaware of any additional measures management may take to stabilize the company's domestic performance. We believe this may require significant fixed or commercial outlays, and that the benefits could take a long time to materialize.
Given the company's deteriorated operating performance and management and governance uncertainties, we now consider it unlikely that TI will reduce leverage in the near team through a capital contribution, such as equity or subordinated debt with equity characteristics.
Spain-based Telefonica S.A. recently increased its ownership in TI's controlling shareholder Telco, and we understand that it may further increase its stake in the future. Telefonica owns competitors of TI units in Brazil and Argentina. While we understand that Telefonica will not participate in TI's board discussions about Latin America, we believe that its increased ownership creates further risks of a continued lack of strategic direction at TI.
We have revised our management and governance (M&G )score on TI to "fair" from "satisfactory" for the following reasons: First, we think a lack of clarity exists in the company's strategy, including continued uncertainty over a spin-off of the fixed-line