Moody’s upgrades OTE, stable outlook

Moody’s Investors Service has raised the corporate family rating (CFR) of Hellenic Telecommunications Organisation S.A. (OTE) to Ba3 from B2 and upgraded the probability of default rating (PDR) to Ba3-PD from B2-PD, together with the senior unsecured ratings on the global medium-term note programme (GMTN) and the global bonds issued by subsidiary OTE PLC. The outlook on all the ratings is stable.

“OTE’s upgrade to Ba3 is in line with the sovereign ceiling of Greece which was recently upgraded,” said lead analyst Carlos Winzer.

“It also signifies the company’s improved liquidity risk management, operating performance and successful deleveraging efforts under its current business plan and against the backdrop of a challenging market environment,” added Winzer.

OTE remains a predominantly Greek business and with 70% of its revenues generated at home, its ratings are constrained by the country’s sovereign ceiling.

OTE has demonstrated a degree of resilience through the recent period of sovereign stress and has taken steps to further insulate itself from a weak economy, having limited exposure to domestic banks and enhanced international banking relationships. For example, all of the OTE Group’s outstanding debt (bonds issued under the GMTN and Syndicated Facility at Cosmote Romania) is governed by English law. Also, OTE has no Greek bank debt exposure and therefore is limited to any disruption in the native banking system. These factors have enabled OTE’s ratings to be positioned higher than the government’s bond rating, and at the Ba3 sovereign ceiling. The rating also factors the potential for support from Deutsche Telekom AG (Baa1 stable), Moody’s said in its ratings rationale.

However, the rating agency stated that at this new rating level, the Ba3 sovereign ceiling constrains the rating of OTE which adequately factors in the still fragile recovery of the Greek economy. Being four notches above the Caa1 government bond rating is justified by the underlying characteristics and credit strength of OTE, it said.

Moody’s added that OTE’s liquidity risk management has improved substantially over the past few months. As a result of asset disposals and refinancing in the market, the company has a cash buffer of around EUR 1.15 bln. This buffer, together with expected future free cash flow generation, comfortably prefunds OTE’s cash needs beyond the next 24 months. In addition, Moody’s expects that the company will sustain improved financial ratios over the next 24 months. The management’s focus has been on operating expenditure containment, cash flow generation (free cash flow expected to exceed EUR 500 mln in 2014) and a progressive reduction in debt, committed to a maximum reported net debt/EBITDA ratio of 1.5x/1.6x over the next few years.

OTE has a strong liquidity profile, which was reinforced with a EUR 700 mln six-year fixed-rate bond issued on July 7 and there is no requirement for OTE to issue more debt in the near term. Indeed, it will only do so to take advantage of opportunities that may arise in the market. In Moody’s view, OTE’s internal annual cash flow generation of EUR 500 mln and reported cash of some EUR 1.3 bln as of March 2014, should enable the company to cover its cash needs and total remaining debt maturities of EUR 11 mln in 2014, EUR 16 mln in 2015 and EUR745 mln in 2016.

OTE is the leading telecoms operator in Greece, servicing 2.9 mln fixed access lines, 1.3 mln fixed-line broadband connections, 278,742 TV subscribers, and 7.4 mln mobile customers. It also offers mobile telephony in Albania (2.1 mln customers), and Romania through Cosmote, and wireline services in Romania through RomTelecom. OTE is also involved in real estate and satellite communications, and owns 100% of Germanos, the largest distributor of technology-related products in southeast Europe. The Group reported revenues of EUR 4.1 bln for the 12 months to March 2014.