Fitch Ratings has affirmed
A full list of rating actions is detailed below.
TEF's rating reflects its broad geographic spread of leading telecommunications businesses, solid cash flow, advanced infrastructure investment and improving financial performance. A prudent financial policy, including a sizeable reduction in gross debt and the effective adoption of capital-light structures in its Latin American (Hispam) operations, have been hampered by negative currency impacts, in particular a weak Brazilian real (BRL).
Management actions to reshape portfolio operations, effective currency strategies and cuts in shareholder distributions, have been supportive of the rating and helped build leverage headroom to its rating downgrade thresholds. Positive operating trends and stronger Latin American currencies are forecast to increase headroom further.
Our rating case forecasts net debt/EBITDA of 2.9x in 2022 and 2.7x by 2024, compared with upgrade / downgrade thresholds of 2.7x and 3.2x, respectively. Macro-economic uncertainty and its associated operational impacts and the sustainability of foreign-exchange (FX) rates are downside risks.
Key Rating Drivers
Improved Rating Headroom: TEF's funds from operations (FFO) net leverage of 3.4x at end-2021, versus our previous rating-case forecast of 3.6x, reflected better-than-forecast cash flow generation and debt reduction and, to a lesser extent, positive FX movement. Our current rating case forecasts 3.3x for 2022, on continuing cash flow improvement and the positive effects of stronger FX rates in
Businesses Performing Well: TEF's key consolidated markets of
Market Consolidation:
Consolidation in
Sizeable VMO2 Dividend: The creation of the
Positive Currency Effects: Currency depreciation has been weighing heavily on leverage for a number of years despite TEF's sizeable debt paydown, most notably the fall in the value of the Brazilian real and the translation effect this has had on reported cash flows. The real and Latin American currencies, however, have generally strengthened in 2022 and our base case forecast of
Longer-Term EM Currency Effects: Over the longer term Fitch typically expects emerging-market (EM) currencies to follow a negative trend. Management aim to continue growing revenue faster than inflation in its Latin American markets to counter these currency effects.
Derivation Summary
TEF is rated broadly in line with other geographically diversified European telecom operators, such as Orange,
TEF and its peer group combine strong positions in fixed or mobile markets with substantial and diverse cashflow operations. Operators with a single-market focus, such as
Key Assumptions
Revenue to decline about 1% in 2022 (reflecting negative impact from the deconsolidation of
Fitch-defined EBITDA margin at 26%-27% in 2022-2025
Cash capex (including spectrum payments) averaging at about 15% of revenue in 2022-2025
Annual pre-retirement obligations included in FFO of about
Annual cash dividends of about
M&A at around
EUR/BRL exchange rate of 5.2 in 2022-2025
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO net leverage falling sustainably below 3.1x (equivalent to net debt/EBITDA below 2.7x)
Improved competitive position in TEF's domestic and key international markets combined with strong growth in pre-dividend FCF
Cash flow from operations (CFO) less capex/gross debt expected to be consistently above 15% (excluding one-off spectrum costs)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage trending above 3.6x on a sustained basis (equivalent to net debt/EBITDA above 3.2x)
Pressure on FCF driven by EBITDA erosion, FX and capital repatriation constraints, higher capex and shareholder distribution, or significant underperformance in core domestic and international markets
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
(C) 2022 Electronic News Publishing, source