Fitch Revises OTE's Outlook to Negative on Greek Economic Woes

Fitch Ratings has revised Hellenic Telecommunications Organization's (OTE) ratings outlook to Negative, whilst affirming the company's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB'. Fitch has also affirmed OTE PLC's senior unsecured rating at 'BBB'.

­The Outlook revision reflects Fitch's concerns about a potentially deeper and more prolonged economic downturn in Greece, as a result of recent austerity measures announced by the Greek government. This in turn increases uncertainty with respect to OTE's 2010 cash flow performance and also - significantly - the speed at which the company can return to some peer-comparative level of cash flow growth in 2011, or even 2012.

The agency noted in a 12 April 2010 comment that there was no material linkage between the Greek sovereign and OTE, and this continues to be the case. Rather the agency's concerns centre on the perceived growing risk of stand alone operational factors related to weakening consumer sentiment in Greece. Furthermore, relative to its peers in Portugal, and Spain, OTE does not benefit from any significant South American cash flow growth and is primarily exposed to deteriorating domestic conditions.

Fitch believes that OTE, like most telecoms companies in Europe, is positioned to defend itself against deteriorating market conditions. Nonetheless, the likelihood of a much sharper than anticipated drop in fixed-line and mobile revenues and cash flows in Greece is a real possibility over the next 12 months. Fitch also believes that the company may have further flexibility to scale back capex to support free cash flow (FCF) generation. However, substantial and sustained reductions in capital investments, if any, would result in underinvestment in network development over the medium term and render OTE weaker against its peer group.

If OTE is able to demonstrate better resilience to market conditions by year end 2010, Fitch will likely revise its Outlook back to Stable. However, sustained negative revenues and EBITDA pressure will likely result in a one notch downgrade of the company's rating.

Fitch recognises the presence of Deutsche Telekom - as a 30% shareholder in OTE - as a credit positive, not least because of the potential for DT to participate in OTE's refinancing efforts, if needed. The agency notes that OTE is facing re-financing risk resulting from a EUR2.2bn debt maturing in 2011, of which EUR1.5bn is due in February 2011, while the company's current liquid resources (cash, FCF and undrawn facilities) only covers 70% of the total. As such, OTE will require some access to the debt markets to refinance maturing debt, or else DT will be required to support liquidity in some form.