NEW YORK--(BUSINESS WIRE)--Credit default swap (CDS) spreads on Telecom Italia SpA (TI) are widening as Italy's largest phone company battles a weak economy and price pressure from competitors, according to Fitch Solutions.
Fitch Ratings downgraded TI's Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB' on August 5. The Outlook on the Long-term IDR is Negative. The downgrade reflects the worsening operating conditions in TI's domestic business due to regulatory pressure, a continued mobile price war and a weak economic environment. The erosion of TI's cash flow generation is expected to continue into 2014. However, if the domestic business can be stabilized and leverage brought under control, Fitch fundamentally views TI as an investment grade credit.
The price of credit protection on TI's debt over a five-year horizon is 82% higher compared to the broader sector, based on Fitch Solutions' CDS Index for Italian telecoms. CDS liquidity for the issuer remains high, trading in the 11th global percentile (or with stronger liquidity than 89% of the contracts in Fitch's CDS pricing universe). This indicates a high level of market uncertainty over the company's credit prospects.
Meanwhile, Fitch Solutions' 1-Year Probability of Default (PD) for Telecom Italia has climbed to 11.2%, significantly underperforming the 1-Year PD Index for Western European telecoms, currently at 1%. This represents a 152% surge from its year-ago level, reflecting an increasingly negative sentiment from the equity market.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.