Fitch affirms Telefonica's at 'BBB+'; outlook negative


(Repeat for additional subscribers)

March 21 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Telefonica SA's (Telefonica) Long-term Issuer Default Rating (IDR) at 'BBB+', with Negative Outlook, and Short-term IDR at 'F2'. Please see below for a full list of rating actions.

The affirmation reflects Fitch's view that Telefonica continues to represent one of the most diverse operating and cash flow profiles among the large incumbent peer group in EMEA. Compared with Deutsche Telekom (BBB+/Stable) and Orange (BBB+/Negative), Telefonica exhibits stronger geographic diversification, a lower, albeit significant, reliance on its domestic market, along with significant scale and leading market positions in its international portfolio. Management has shown both a resolve and ability to reduce debt through disposals and cuts to shareholder distributions. A number of headwinds exist including an intensifying competitive environment in Spain, along with significant currency volatility, mainly due to operations in Latin America. These downside risks are reflected in the Negative Outlook, although this will likely be revised to Stable if our current forecasts are met in 2014.


Proactive Portfolio Management & Deleveraging A spike in leverage, following the 2010 Vivo acquisition and coincident economic slowdown, has been managed well. A combination of material cuts to its distribution policy, the sale of non-core assets and stake sales, along with hybrid issuance has seen the company reduce net debt to EUR46.6bn (EUR43.6bn adjusted for post FY13 disposals) - i.e. adjusted for 50% equity credit assigned to the hybrid instruments. This compares with debt of EUR56.3bn at FYE11. Fitch expects funds from operations (FFO) net adjusted leverage to stabilise around 3.3x in 2014 and beyond, a level that is consistent with the large European incumbent peer group and a 'BBB+' rating. FFO net adjusted leverage was 3.2x at FYE13.

Positive Diversification,

Telefonica exhibits stronger portfolio diversification than similarly rated peers, such as Deutsche Telekom and Orange SA. Of this group, Telefonica is least reliant on its domestic market at 45% contribution to operating cash flow (OCF; EBITDA less capex) from Spain in 2013, compared with Deutsche Telekom's 70% from Germany and Orange's 65% from France. Fitch estimates that following the E-Plus transaction (which remains subject to regulatory approval), Germany will account for 9% and the UK a 10% contribution - boosting the cash flow from competitive but nonetheless stronger performing northern European economies, while Latin America will contribute 39%. Such broad diversification offers protection against economic cycles as well as structural shifts and maturing regional trends.

Domestic Operating Environment Remains Tough

Spain is still Telefonica's single largest market, accounting for 43% of forecast 2014 OCF. A domestic economy characterised by high unemployment and weak domestic consumption, along with an increasingly tough competitive environment will continue to weigh on this part of the business. Telefonica's "Fusion" quad-play product has fundamentally shifted pricing in the market, though without slowing the pace of mobile subscriber losses. The incumbent lost a total of 1.6 million mobile customers in the 12 months to December 2013, while mobile service revenues contracted by 16%. Aggressive MVNO mobile offers have had a significant impact on the established operators, while Vodafone's acquisition of ONO, the country's largest cable operator, is likely to increase fixed line and quad-play pressures. Domestic EBITDA fell 7% in 2013. Further contraction is likely in 2014 and may continue beyond, in Fitch's view.

FX Headwinds

Currency volatility primarily related to Telefonica's Latin American businesses had a material impact on 2013 reported results - revenues suffered a negative EUR5bn currency impact; with a EUR1.7bn effect felt at the EBITDA level. Currency devaluation in Brazil, Argentina and Venezuela has been significant, with the prospect of any near-term easing in these pressures far from certain. While its LatAm operations generally report top-line growth and solid underlying performance, currency volatility removed the underlying growth benefits of the LatAm business in 2013 and in the absence of any material appreciation will continue to impact reported group level results in 2014.

Fitch estimates that LatAm countries in 2014 will account for around 39% of Telefonica's OCF and their currencies at 8% of group debt, giving rise to a currency mismatch. Euro zone countries are forecast to represent 52% of OCF, compared with an estimated 80% of euro-dominated debt.

Measured M&A Approach

M&A risk at Telefonica is viewed by Fitch as measured and its intentions in this area have been well-articulated by management. Recent activity has focused on the sale of non-core operations with the agreed disposal of businesses in the Czech Republic and Ireland expected to raise around EUR3bn in proceeds in 2014. Disposal proceeds along with approximately EUR900m to be raised from minorities (at the Telefonica Deutschland level) in a rights issue accompanying the E-Plus acquisition will offset the EUR5bn cash component of the German acquisition. The company's leverage neutral approach to funding this deal underlines caution in financial policies, which Fitch views positively. The possibility of market consolidation in Brazil would be a transaction that makes strategic sense - regulatory barriers to such a development are though considered high.


Negative: Future developments that could lead to negative rating actions include:

-FFO net adjusted leverage approaching 3.5x with little expectation that deleveraging comfortably below this level can be achieved organically.

Mid-single digit or below pre-dividend FCF margin would increase downgrade pressure.

Positive: Future developments that could lead to a revision of the Outlook to Stable, are:

- FFO net adjusted leverage well below 3.5x on a sustained basis. A mid-to-high single digit pre-dividend free cash flow (FCF) margin, which is also deemed an important metric at 'BBB+', on a consistent basis is likely to help stabilise the Outlook

The following ratings are affirmed:-

Telefonica SA Long term IDR: 'BBB+'; Negative Outlook

Telefonica SA Short term IDR: 'F2'

Telefonica Europe BV's /Telefonica Emisiones' bonds: 'BBB+'

Telefonica Finance USA LLC's preference shares: 'BB+'

Telefonica Europe BV subordinated hybrid securities: 'BBB-'


View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Wondering How You Could Save on Home Insurance?

    Get a quote from Farmers Insurance and discover how you could save. Speak with an agent to get the knowledge you need to make an informed decision.

    AdChoicesFarmers InsuranceSponsored
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Venture Capitalist Makes Case Against 'Shark Tank'

    If you watch the TV show "Shark Tank" as entertainment and not to obtain a startup education, you will be benignly inspired by fellow entrepreneurs. "Shark Tank" is a reality competition show that features entrepreneurs pitching business ideas to a panel of potential investors, referred to as…

    The Wall Street Journal
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Play

    Hilsenrath: Fed Still Sees 2015 for Rate Increase

    WSJ's Jon Hilsenrath discusses the Federal Reserve's decision to hold steady on interest rates, but the central bank foresees a rate increase by early 2015. Photo: Getty.

    WSJ Live
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Tired of Living Paycheck to Paycheck?

    New website reveals how to save $1,000's when you're living paycheck to paycheck. See exactly how.

    AdChoices Media ForceSponsored
  • Don't care about Alibaba? Here's why it may matter

    When the Alibaba Group Holding prices its initial public offering Thursday, small businesses in particular will be watching. Founder Jack Ma -the former English-teacher-turned-dot-com billionaire-has touted his e-commerce platform as a way for smaller merchants to expand their international…

  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Boeing may have outfoxed Musk, but it could have bigger problems

    Elon Musk is arguably one of the greatest entrepreneurial minds of the 21st Century, but he was outsized an old school aerospace giant. Boeing won the bulk of NASA’s contract for a space taxi.  One of the other companies vying for the deal is SpaceX, the company headed by Tesla’s Musk, will get a…

    Talking Numbers
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • AARP® Auto Insurance Program from The Hartford

    50+? Request a free quote and you could save $404* on Auto Insurance from The Hartford!

    AdChoicesThe HartfordSponsored
  • Play

    Top Starter Funds for Investors on a Shoestring

    Morningstar's Christine Benz highlights some of her favorite ETFs and low-minimum-investment funds for new investors.