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TI.A - Telecom Italia SpA News Story

$5.21 0.0  0.0%

Last Trade - 05/07/19

Sector
Telecoms
Size
Large Cap
Market Cap £9.46bn
Enterprise Value £32.47bn
Revenue £13.58bn
Position in Universe th / 6853

Fitch: Telecom Italia's Cash Flow Generation, Cost Savings Key for Rating

Thu 7th July, 2016 10:51am
(The following statement was released by the rating agency)

LONDON/MOSCOW, July 07 (Fitch) Fitch Ratings says Telecom Italia SpA's (TI, 
BBB-/Stable) ability to convert improving operating trends and underlying EBITDA 
into stronger cash flow is key to the stability of its rating.

The company's leverage at end-2015 was high: net debt/EBITDA was 3.6x and FFO 
adjusted net leverage was 4.3x. Cash flow improvements, driven mainly by 
domestic performance, should result in modest deleveraging in 2016 and 2017. 
Headroom remains limited, as we expect TI's FFO adjusted net leverage to remain 
at around our downgrade threshold of 4.2x in 2016, improving to an estimated 
4.0x by end-2018. TI's cash flow visibility is lower than most of its peers; 
stability and improvements in operating cash flow and deleveraging over the 
coming quarters will be important to the rating.

TI's revised efficiency targets announced at its 1Q16 results underline 
management's commitment to improving domestic financial performance, especially 
in 2016. Fitch believes a number of one-off items affected 2015 results and cash 
flow should gradually improve through 2016. On a trailing 12-month basis, FFO 
adjusted for non-recurring items (as defined by Fitch, mainly the costs related 
to a high level of bond buybacks) at 1Q16 improved to EUR5.9bn, from EUR5.7bn at 
FYE15. Gradual but sustainable improvements are important, as transformational 
events such as further asset sales are unlikely.

Unlike some of its peers, TI has few of the levers available to larger, more 
diversified group's to reduce leverage. The ordinary dividend has been cut 
completely and the savings share payout has been reduced to a minimum. 
Opportunities for non-core disposals are limited. However, TI's sale of its 
Argentina stake and the conversion of the mandatory convertible are positive, 
which together should provide around EUR2.0bn in debt relief in 2016. A further 
sell-down of TI's Inwit stake appears to have been put on hold; although any 
resulting benefits from this would in part be offset by an increase in lease 
adjusted debt.

TI's efforts to reduce leverage have been challenged by the conflicting 
ambitions of network investment and a need to improve cash flow and credit 
metrics. We believe that network investment in Italy, a country where fibre 
deployment has lagged that of other markets, is supportive of long-term 
operational trends. The competitive threat from Enel's Open Fiber project 
underlines the importance of TI's investments, which should improve TI's 
convergent and triple-play service offering.

Enel's fibre plans could provide a significant alternative wholesale 
infrastructure. TI aims to rollout superfast broadband to 84% of Italian 
households by 2018, while Enel's Open Fiber project is targeting to reach 7.5m 
fibre homes over the next few years. With Enel yet to begin its fibre 
deployment, delivery of the project will be important, as will TI's ability to 
remain ahead of Open Fiber roll-out. We believe an effective alternative network 
could strengthen retail convergent competition from Vodafone and others, as well 
as the more obvious threat to TI's existing wholesale revenues.

Potential changes to the shape of the Italian mobile market, in particular the 
proposal of an Iliad-backed new entrant should the WIND/H3G merger go ahead, do 
not pose a significant threat to the current market structure, in our view. 
Market conditions have proven intensely competitive in recent years. However, 
market leaders, TIM and Vodafone, have been successful in imposing a more 
disciplined and rational approach to market pricing. 

Formerly a growth driver, TI's Brazilian operations (TIM Brasil) are suffering 
mainly from macro effects. We do not view TIM Brasil as a key cash flow 
contributor to the group or as a significant credit driver, although it could be 
a drag on the group's revenue and EBITDA over the next one to two years given 
the macro environment. Fitch would not expect to react to this alone, provided 
that TIM Brasil is not significantly underperforming the wider market and that 
margin and cash flows are being defended. Fitch does not expect major changes to 
the shape of the market while Oi is being restructured. Nevertheless, 
consolidation remains likely over the medium term, with TIM Brasil's involvement 
in such an event continuing to be viewed by Fitch as event risk.

Contact:

Stuart Reid

Senior Director

+44 20 3530 1085

Fitch Ratings Ltd

30 North Colonnade

London E14 5GN

Slava Bunkov

Director

+7 495 956 9931

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

Additional information is available at www.fitchratings.com.

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