Analysis: Telefonica back in shape to clear the obstacles of debt

Workers break at the next meeting of Telefonica Tower entrance in Barcelona January 30, 2013.

Credit: Reuters/Albert Gea

By Clare Kane and Josie Cox

MADRID/LONDON | Wed Feb 20, 2013 9: 31 am EST

Madrid/London (Reuters)-Spanish telecoms company Telefonica (TEF.MC) is off for life after one year from the sale of assets and money saving moves and we must now focus on repairing your internal business, increasing your profits and the recovery of profits.

Eight months ago, she was weighed down by 58 billion euros ($ 78 billion) debt, endangering its investment credit rating, with a built up bigger debts than their peers by taking advantage of the credit boom in Spain a decade ago to finance expansion in Latin America, where he worked in more than a dozen countries.

But since last summer, has sold down its stake in China Unicom (0762. HK) for 1.1 billion and 800 million shares of preference share debt for equity. It also scrapped its dividend from 150 euro cents per share for 2012 and a program to buy back shares to save 6.8 billion euros. He also raised 1.45 billion of flying your German O2-branded unit (O2Dn. DE).

As a result, Telefonica is expected to say in 2012 results on 28 February that now has my attitude of net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) to 2.35, from 2.65 in late June, credit analysts.

This will protect your credit rating and could mean Telefonica won't have to spin out its Latin American side with 8 billion share offer as once expected, or follow rivals with other measures to raise cash.

A Dutch group KPN (KPN. AS) earlier this month launched a share offer 3 billion euro and 1 billion euro hybrid capital issue while Telecom Italia (TLIT. MI) is also planning a hybrid debt issue to help Fund the cost of infrastructure.

The main challenge for Telefonica now has to fix all the important Spanish business, which lost more than 3 million mobile users last year, the company is now trying to win back business osuetâval Internet, TV, mobile and fixed line services under its brand Movistar synthesis.

But credit analysts say even without an immediate growth in EBITDA, it can protect the debt/EBITDA ratio to it by continuing to hold back on its payments once a hefty dividend.

Average EBITDA for the year 2012 is expected to come about 21.1 billion euros, the lowest level since 2007 and down from 23.7 billion in 2011 and most famous analysts expected to then fall 20.4 billion euros in 2013 20.5 billion euros in 2014 and 20.8 billion in 2015, according to Thomson Reuters StarMine.

In the meantime, they are forecasting, the company will pay cash dividends for the year 2013 only 60 euro cents, followed by 74 cents and 79 cents for 2014 to 2015, well down 130 cents paid for 2011 and 150 cents, which were envisaged for 2012.

"The temporary suspension of the dividend has had a greater impact on free cash flow from other telcos because of the size of the payment. As a result, Telefónica must be able to de-lever to its targets even with a declining EBITDA, "said Nancy Utterback, credit strategist management company Aviva investors.

NO MORE ASSET SALES?

(Telefonica) what should I do and what I expect to do is to keep this figure debt and gradually improving EBITDA, "said Carlos Winzer, an analyst at Moody 's, adding that he believes other big asset sale as a flotation of its Latin American arm was no longer necessary.

The Telefonica into a better profile of the debt markets is already reflected in the price of credit default swaps to insure of Telefonica's debt over five years, which have fallen by more than 550 basis points (5.5 percentage points) in July to only 250 basis points, meaning costs 25,000 euros to insure 1 million of debt.

In comparison, Telecom Italy (TLIT. MI) drives deals at around 330 basis points, down 41 percent from its 560 basis-point high. Since this time last year a five-year CDs, Deutsche Telekom has fallen about 26 percent to 90 basis points while France Telecom has edged just 8 percent lower to 128 basis points.

Telefonica, meanwhile, last month raised 1.5 billion euros in 10-year contract that prices at 230 basis points over mid-swaps, equates to a coupon of 3.987 percent. A year earlier the bond price 6 years of much more expensive mid-swaps plus 300 basis points.

"Spreads are still affected by the correlation of sovereign, but yields have come down substantially," said Utterback.

THE SHARE PRICE

There are also some signs that investors ' capital group draws back to exercise, even though Telefonica has yet to prove he can determine what Spain constitutes a third of operating profits and resolve issues elsewhere in his empire.

One-third of 39 analysts surveyed now have a "buy" ratings on the stock, with the remaining 26, evenly divided between the "hold" and "sell", according to the Thomson Reuters Eikon.

The price of shares in the company also increased 24 percent from their July lows to close 9.795 euros on Tuesday.

"The key thing we are watching is the cash flow stability of major Spanish operation," said Laurent millet, who runs Artemis European agricultural opportunities.

"We wouldn't like to swim more assets," he added.

European comparison TELECOMMUNICATIONS company EV/EBITDA return on capital NET debt debt/equity (euro 2012Est) Deutsche Telekom 3.73 0.71 1.63 38.5 billion France Telecom 3.90 € 5.67 1.43 19.1 billion KPN 5.77 3.81 4.16 11.1 billion Telecom Italia 6,25-6.58 1.75 28.6 billion Telefonica 5.02 6.86 3.32 51.5 billion

(Source: Thomson Reuters Eikon data) ($ 1 = 0.7487 EUR)

(Reporting by Claire Caine in Madrid and Josie Cox of IFR markets in London; editing by Greg Mahlich)