Moody’s downgrades OTE telecom

Moody’s Investors Service yesterday downgraded the long-term ratings of OTE Telecoms and guaranteed subsidiaries to Baa2 from Baa1. This concludes the review process initiated on 17 March 2008, when Deutsche Telekom (DT) announced its intention to acquire a controlling equity stake in OTE. The rating outlook is now stable. The Prime-2 rating for OTE’s short-term debt was not affected by the review process and was affirmed. The downgrade reflects Moody’s decision to lower the company’s support factor – one of its four rating components under the rating agency’s methodology for Government-Related Issuers (GRIs) – from «medium» to «low» following DT’s agreement with the Greek government to acquire a controlling stake in OTE. As a result, OTE’s B4 rating no longer gets the benefit of any uplift from implicit government support and Moody’s doesn’t expect this to change over time. The decision also takes into consideration the Greek government’s put options as well as pre-emptive rights granted to DT as part of the shareholder agreements. OTE’s other GRI factors, including its baseline credit assessment of 9, have not changed. Moody’s rating action on OTE was prompted by the conclusion of the negotiations between DT and the Greek government, which were initiated on 17 March 2008, according to which DT will acquire an initial 25 percent of the ordinary share capital of OTE for approximately -3.2 billion. In addition, DT will have pre-emptive rights over the government’s remaining 10 percent holding, which indicates that DT may end up holding a 50 percent stake plus one share in OTE. Moody’s also understands that DT and the Greek government will each appoint five members of the 11-person board, with DT also appointing the CEO (who will have the casting vote in the event of a deadlock). The Greek government will appoint the chairman. The shareholder agreement stipulates that the Greek government will vote alongside Deutsche Telekom in any shareholder resolutions, although this obligation is waived with respect to certain decisions.