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Fitch: CEO departure narrows options for Telecom Italia

Staff writer |
The resignation of Franco Bernabe as chairman and CEO of Telecom Italia (TI) removes the possibility of a large capital increase, which would have been positive for TI's credit profile, Fitch Ratings says.

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Mr. Bernabe had been advocating issuing stock to help reduce the group's debt, but his departure is an indication that shareholders would not accept that plan.

Uncertainty is likely to persist as Marco Patuano, Telecom Italia's Chief Operating Officer, takes over as CEO and formulates a plan of action. In addition to improving the domestic business, Fitch believes that possible alternative options to strengthen the business and reduce debt could include a sale of TIM Brasil as well as a network spin-off.

Both of these options, which have been regularly highlighted in the press, would take at least 6-12 months to complete, and are therefore unlikely to relieve the pressure on TI's rating in the short term.

Telecom Italia has limited headroom at is current 'BBB-' rating with Negative Outlook, mainly due to continued weakness in the domestic business. Fitch may downgrade the company if our forecasts indicate further high-single digit EBITDA declines in the domestic business in 2014. If Telecom Italia is unable to keep leverage as measured by unadjusted net debt to EBITDA (excluding Telecom Argentina) sustainably below 3.5x this could also result in a downgrade.

A potential sale of TI's 67% stake in TIM Brasil may reduce Telecom Italia's leverage, as measured by Fitch, by around 0.2-0.4x. TI's rating does not benefit from diversification as TI's domestic business accounts for over 90% of the group's EBITDA less capex (excluding Telecom Argentina).

Fitch believes that the credit impact on Telecom Italia of a potential spin-off of its fixed-line access network depends mainly on the details of the agreement Telecom Italia reaches with the Italian telecoms regulatory body, AGCOM.

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