Fitch affirms OTE on Cosmote deal

Fitch Ratings yesterday affirmed the Hellenic Telecommunication Organization’s (OTE) long-term issuer default rating (IDR) at BBB. The outlook for the long-term IDR is stable. At the same time, the agency has affirmed OTE’s senior unsecured rating at BBB. The actions follow the announcement that OTE will submit a tender offer for the 32.17 percent of Cosmote’s shares it does not own for -2.83 billion. Fitch’s recognizes the strategic operational and financial rationale of OTE’s intention to acquire full control of Cosmote with the existing dividend leakage issue being resolved as a result. The ratings affirmation reflects the view that, despite the expected higher leverage resulting from the additional debt it will have to incur, OTE’s business drivers remain positive and should allow for rapid deleveraging. However, Fitch notes that, as a consequence of this transaction, OTE’s remaining financial flexibility is limited within the assigned rating category. OTE reported good performance in the half-year to June 2007, with group revenues advancing by 8.6 percent (including the material positive impact of the Germanos acquisition). The strong asymmetric digital subscriber line (ADSL) growth failed to make up for the continued erosion of the traditional fixed voice segment. Competitive and regulatory pressures materialized by the progress made by local loop unbundlers and the indirect but significant impact of interconnection rates cut on fixed-to-mobile revenues. On the profitability side, first-half EBITDA (after voluntary retirement costs) increased by 5.2 percent, reflecting Cosmote’s and OTE’s respective 17.5 percent and 5.2 percent, and the margin dilutive impact of the Germanos acquisition. OTE confirmed its guidance for 2007 with group revenue growth in the 6-7 percent range and EBITDA growth between 8-9 percent driven by sustained strength of its domestic and international mobile operations (30 percent and 15 percent revenue and EBITDA growth target, respectively, for 2007).