(The following statement was released by the rating agency)
Oct 02 - The integrated incumbent telecom operators in Western Europe face some big differences in the strength of their domestic economies, competition from alternative networks or new entrants, and their extent of geographic expansion. Standard & Poor's Ratings Services' report, "Europe's Telecom Incumbents Preserve Strong Business Risk Profiles, For The Moment," published today, looks at the credit strengths and weaknesses of seven of these companies, providing insight into variations in their recent performance and how they'll fare going forward.
Among these companies, all of which have both fixed-line and mobile operations, we consider Belgacom to have the strongest credit profile, while Spanish operator Telefonica has the weakest. The seven companies are all investment-grade, with ratings ranging from 'A' to 'BBB', but those at the lower end face greater financial risks, in our view. While all of them enjoy "strong" business risk profiles under Standard & Poor's Rating Services' criteria, there were wider gaps in their financial risk profiles, which ranged from "modest" to "significant." Some key differences--from the relative strength of their domestic sovereigns to their levels of debt and liquidity--account for much of the divergence in their ratings and performance.
Telecom incumbents typically enjoy large fixed-line and mobile customer bases, strongly established brands, sas well as extensive network coverage and leading subscriber market shares that allow for economies of scale. Moreover, barriers to new entrants are generally high because of the massive investments required to replicate existing networks and established brands. Ongoing pressures from pro-competition regulation, rapid commoditization and technological changes, cannibalization risks, and often higher consumer price-awareness are currently testing those business risk profiles, however. To determine the business risk profile for each issuer, we analyze three major factors: 1) country, macroeconomic, and industry risk; 2) competitive position; and 3) profitability.
Our assessment of financial risk profiles takes into account 1) the operator's financial policy and risk tolerance; 2) its cash flow adequacy and capital structure; and 3) its liquidity. We rank TI and Telefonica lowest in terms of financial risk profile because of their higher leverage than most peers, and the potential impact of weaker domestic sovereigns on cost of, and access to, capital markets.