Moody's cut TIM's long-term rating to "Ba2" from "Ba1," citing "a very competitive operating environment in Italy which will further constrain the company's ability to strengthen cash flow generation and reduce leverage."
The rating agency flagged higher business and financial risks due to fresh investments in Brazil, the restored dividend policy and the increasing complexity of the group structure.
At 1545 GMT, TIM shares were down 3.2%, compared with a 2.5% fall in Europe's telecom index.
"Moody's effectively highlighted the lights and shadows of TIM's equity story," Banca IMI analysts said.
"Despite CEO (Luigi Gubitosi's) efforts to organically and inorganically reduce the group's leverage, Moody's downgrade separates TIM from the investment grade level by two notches," it wrote in a note.
Fitch and S&P remain one notch above Moody's, which expects TIM's adjusted net debt-to-core profit ratio to peak at 4.2 times in 2020 and to gradually start decreasing to reach 3.7 times by 2022.
Analysts said Moody's move was anticipated given the negative outlook on the rating since 2019 and the impact of the pandemic which hurt 2020 earnings.
"We don't expect any significant impact on TIM cost of debt," a broker said in a note to clients.
However, the price of TIM's bonds fell across the curve, pushing yields higher on the secondary market.
The yield on a bond maturing in May 2026 rose to 1.71% from 1.60% on Thursday at 1545 GMT, while a September 2025 bond yielded 1.64% on Friday, up from 1.50% the previous close.
TIM's gross debt totalled 32.3 billion euros ($39.2 billion)as of Sept. 30.
($1 = 0.8243 euros)
(Reporting by Elvira Pollina and Claudia Cristoferi in Milan; Editing by Mark Potter and Matthew Lewis)