Telecom Italia risks downgrade to junk

Telecom Italia, the company created from a merger of Italy's disparate phone operators two decades ago, risks a downgrade to junk-bond status after rejecting calls for a stock sale and failing to win capital from overseas investors.

The cost of insuring Telecom Italia's debt using credit-default swaps rose for a third day, taking the increase since the company's August 2nd earnings report to 60 basis points to an 11-month high of 402 basis points in London. The swaps imply a B2 rating, five steps below investment grade, according to Moody's Analytics. After Fitch Ratings' one-step cut yesterday, all three major credit companies rank the debt at one step above junk. A cut to non-investment grade would be the first since ratings started last decade on Telecom Italia's debt – which at €28.8 billion on an adjusted net basis is triple its market value – and would put the Milan-based carrier in the same league as Portugal Telecom and Greece's Hellenic Telecommunications.

"In the absence of a rights issue, a cut to junk looks highly likely and would just be a matter of time," said Roger Appleyard, head of global credit research at RBC Capital Markets in London, who puts the chances of a downgrade by Moody's at more than 90 per cent. "Telecom Italia is not a good story."

Chief executive Franco Bernabe said last week, after reporting a first-half net loss because of a €2.2 billion goodwill writedown, that a downgrade is "one of the possible risks that the company must face".

The yield investors demand to hold Telecom Italia’s €1 billion 4 per cent bond due in January 2020 rose 43 basis points to a record 5.5 per cent on Monday and was little changed at 5.45 percent yesterday.

Telecom Italia's bonds yield an average 5.1 per cent, 2.4 percentage points more than the 2.7 per cent yield on BBB-rated company debt in Bank of America Merrill Lynch's BBB Euro Corporate Index.
– (Bloomberg)