Moody’s Investors Service has affirmed the Baa1 issuer rating of Hellenic Telecommunications Organization S.A. (OTE) and the ratings of the MTN, global bonds and credit facilities issued by OTE PLC and fully and unconditionally guaranteed by OTE. The Prime-2 rating for the company’s short-term debt is also affirmed. The outlook on all ratings remains stable.
The rating affirmations follow the announcement that OTE has submitted a voluntary tender offer to acquire the remaining shares (32.17%) of its mobile subsidiary Cosmote Mobile Telecommunicatios S.A. (Cosmote) at a price of EUR26.25 per share, which equates to a maximum amount of around EUR2.8 billion. The transaction is subject to regulatory approvals and is expected to close by the end of January 2008.
Moody’s considers this transaction to be a strategic move for OTE.
Although the debt-financed nature of the offer will have a slightly negative impact on OTE’s financial ratios in the short term, it will strengthen the group’s position in the medium to long term. OTE already owns 67.83% of Cosmote, which has been fully consolidated for some time.
In its financial ratio calculations for OTE, Moody’s had already assumed 100% of Cosmote’s Ebitda and cash flow as well as an adjustment to debt to reflect the high probability of a debt-financed minority shareholder buyout.
OTE is 28% owned by the Greek state and qualifies as a Government-Related Issuer (GRI) under Moody’s methodology. In accordance with Moody’s GRI rating methodology, the ratings of OTE continue to reflect the combination of the following inputs: (1) a baseline credit assessment (BCA) of 9 (on a scale of 1 to 21, where 1 represents the lowest level of credit risk); (2) the A1 local currency rating of
OTE’s BCA of 9 is assigned based on Moody’s global telecom methodology. It reflects the company’s leading position in the Greek market for wireline and wireless services. OTE’s competitive position in the domestic wire line market remains strong with a leading position in local and long-distance telephony traffic.
Moody’s expects continued and gradual erosion in the company’s market share due to both competitor action and a fall in voice traffic volume via the substitution effect of mobile. As a result, the ability of OTE to continue to cut costs rapidly is critical to determining the potential for free cash flow generation from its core business. In the domestic wireless market, OTE maintains a solid 37% market position through its subsidiary Cosmote.
The company’s financial leverage is modest and it enjoys strong free cash flow. The ratings also reflect the financial risk following investments in RomTelecom and consolidation of its debt. Moody’s understands that OTE does not guarantee any of the external debt located at either RomTelecom or its mobile subsidiary CosmoRom. Additionally, Moody’s factors the country risk exposure resulting from both management commitment to RomTelecom and other subsidiaries in
Moody’s assesses the level of government support for OTE in the event of financial stress as medium, in light of the Greek government’s history of interventionism and its current 28% stake in OTE. Moreover, company employees retain the status of civil servants. The government has also demonstrated its readiness to intervene when it participated in the recapitalisation of OTE’s pension scheme. A further partial sale of the government’s equity stake in OTE would not on its own necessarily represent a change in support.
However, Moody’s has determined that the government’s relationship with the company has evolved, resulting in greater distance arising as part of an effort to encourage the company to operate increasingly as a corporate entity with limited influence and intervention from the government. If the percentage ownership were to drop below 20%, Moody’s would have to further assess whether OTE’s GRI status remains appropriate and whether the ratings should then reflect the rating equivalent of its BCA level of 9, which would result in a one-notch downgrade to Baa2.
Headquarted in
In addition, OTE’s subsidiary RomTelecom (54% owned by OTE) is the leading Romanian fixed-line operator. OTE Group has also expanded during the last decade its geographical footprint throughout South East Europe, making substantial investments which include AMC in
