Moody’s downgrades OTE rating, warns of possible further action

Moody’s Investors Service yesterday downgraded to Baa1 from A3 the issuer rating of Hellenic Telecommunications Organization SA (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 affirmed. The outlook on all ratings is stable. The downgrades conclude the rating review initiated on September 15 and reflect Moody’s conclusion that the company’s support factor – one of the four components under the rating agency’s methodology for Government-Related Issuers – has weakened within the medium level following the Greek government’s recently announced interest in selling part of its 38.7 percent majority stake in OTE. The medium level of dependence and the baseline credit assessment of 9 (on a scale of 1 to 21, where 1 represents the lowest level of credit risk) are not affected and remain unchanged. Moody’s stated that the operating and financial performance of OTE remains strong and that the only reason for the downgrade is related to the weaker government support factor. 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 38.7 percent stake in OTE. Moreover, company employees retain the status of civil servants. The government also demonstrated its readiness to intervene when it participated in the recapitalization of OTE’s pension scheme. In order to reduce its stake in OTE below 33 percent, the government will need to secure parliamentary approval. Moody’s does not anticipate that the New Democracy government, in power since March 2004, will have any difficulties in achieving this objective before the next elections in March 2008, given that it has a parliamentary majority and has therefore been able to push its reform agenda forward to date. According to the rating agency, a 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. Moody’s noted that the government’s public comments on the possibility of a partial sale have been vague to date, with no precise details in terms of the percentage to be sold, the effect that it could have on the civil servant status of the employees or the role that a possible strategic partner could have in the future of OTE. If the percentage ownership were to drop below 20 percent, Moody’s would have to further assess whether its 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 further downgrade to Baa2. (Reuters)