January 10, 2007 | Cbonds
|The credit outlook for Europe’s investment-grade telecommunications operators remains stable, absent event risk considerations, backed by their improved credit metrics and sustainable generation of free cash flow, which should continue to offset the increased competitive and regulatory pressures in what is a mature low-growth environment, Moody’s Investors Service says in a new Industry Outlook. However, given this context, Moody’s believes that the operators’ heightened focus on shareholder returns, acquisitions aimed at geographic diversification and increased investments in broadband poses some key concerns. |
“Thanks to their past success in reducing debt and their ongoing commitment to maintaining debt protection ratios at levels that are generally adequate for their current ratings, European investment-grade operators should typically continue to enjoy rating stability going forward,” says Carlos Winzer, a Moody’s Senior Vice President and author of the report. “However, one of the main issues looking ahead will be whether broadband network investments, in which the operators have generally been placing considerable faith, will in fact fuel future growth.”
Moody’s expects that the fixed-line segment will remain profitable, with fixed-line broadband a significant growth factor, although it faces growing price pressure and market share competition. In addition, although mobile telephony will continue to offset pressures on fixed-line, the mobile subscriber market is close to saturation. The past year has, as anticipated, witnessed further signs of convergence between the telecoms and media sectors through the offer of digital TV services on broadband technologies. Moody’s therefore believes it no longer makes sense to differentiate between voice market and Internet/broadband market competitors.
“For the CEOs of European operators, the two key concerns are share price underperformance and, in the case of the smaller players, the risk of becoming a takeover target. In order to mitigate these concerns, companies are stepping up their balance sheet leverage to minimise their weighted average cost of capital, accelerating the execution of their strategies and reducing their operating expenditures,” Winzer explains.
In general, although Moody’s is expecting a stronger focus on acquisitions and increased shareholder remuneration going forwards, the rating agency believes that operators are continuing to prove their ability to maintain adequate credit metrics and will use most of their free cash flow over the next few years to make strategic acquisitions to ensure future growth in light of the limited organic growth rates characterised by most markets.
Moody’s report discusses in detail the key factors affecting ratings in the sector in 2007 and onwards as well as explaining the rationale behind the rating actions and affirmations during 2006. It also devotes special attention to the rating agency’s methodology for government-related issuers, which applies to nine of the 20 rated companies in this sector.