Second warning over OTE rating

After Standard and Poor’s, another major credit rating agency, Moody’s, announced yesterday it will review the rating of OTE Telecom for a possible downgrade. «Moody’s Investors Service has today placed the A2 long-term debt ratings of Hellenic Telecommunications Organization SA (OTE) on review for a possible downgrade,» a statement released yesterday said. «The review follows the announcement by OTE that due to a payments dispute at Cosmorom (100 percent-owned mobile subsidiary of Romtelecom, the fixed-line Romanian operator, owned 54 percent by OTE), the cross default clause in OTE’s guaranteed bond indenture and syndicated loan facility has been triggered. «Whilst the cross default is a concern, the review incorporates Moody’s much wider concern regarding both financial and business risk following significant investments by OTE in southern Europe. «Additionally, the review will focus on liquidity and potential structural subordination, caused by debt at various subsidiaries. Moody’s review process is expected to take approximately eight weeks, allowing sufficient time for the receipt of audited accounts for 2002. It is possible that any resulting rating action could exceed one notch. «The debt affected by the review is (1.1 billion euros worth in guaranteed notes yielding 6.125 percent) due 2007, issued by its subsidiary OTE PLC and guaranteed by OTE. «Moody’s expects that OTE will seek to waive the triggering of the cross default clause and Moody’s will use the review period to monitor OTE’s resolution of this matter. «Moody’s review will also attempt to identify: first, the potential for RomTelecom and other International Investments to require additional funding; second, subordination issues resulting from subsidiary indebtedness; and, third, liquidity profile. In addition, Moody’s will also attempt to determine the potential costs of exiting poorly performing businesses such as Cosmorom (which is believed to have only between 2 percent to 3 percent of the Romanian mobile market). «Moody’s recognizes that OTE benefits from as yet relatively modest competition in its domestic fixed-line market. Furthermore, OTE has successfully rebalanced its tariffs and Moody’s estimates that OTE has maintained local and domestic long-distance market share of above 90 percent. Whilst OTE’s competitive position is very impressive, Moody’s expects gradual erosion via competitors, and a fall in traditional traffic volume via the substitution effect of the mobile. Given these assumptions, OTE’s cost flexibility will increasingly become important in determining the potential for free cash flow generation from its core business. «The rating agency notes that the vast majority of OTE’s domestic employees are classified as civil servants, with salaries adjusted via collective bargaining and whilst headcount has been falling overall, employee expense has not, and in fact operating margins declined during 2002. The review will therefore also look at the cost structure of OTE’s domestic operations. «OTE… owns 59 percent of Cosmote, the leading Greek mobile operator and has majority stakes in telecommunication operators in Romania, Armenia, Bulgaria, Albania and Macedonia.» OTE said on Tuesday it was not prepared at the moment to provide funds for Cosmorom that would allow it to meet outstanding liabilities of more than 100 million euros. «OTE is not willing at this time to provide additional funds by way of shareholders’ contributions or loan finance to enable Cosmorom to discharge such liabilities in full and has no legal obligation to do so,» OTE said in a statement. OTE recently acquired a majority stake in Cosmorom’s cash-strapped parent Romtelecom, its biggest foreign investment, and has vowed to slash Romtelecom’s workforce in a drive to turn the business around. Those plans do not include Cosmorom, which has a market share of just 1 percent and lost 131 million euros in 2002. OTE said talks between Cosmorom and its main equipment supplier, which it did not name, continued. OTE officials could not be reached for further details. OTE said its fully owned subsidiary, responsible for foreign investments, and the Romanian state, the other shareholder in Romtelecom, were examining options concerning Cosmorom.

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