Telecom Italia Rsp

Earnings Release • Oct 28, 2019

Milano, 28 ottobre 2019 – Tim rende noto che in data odierna l'agenzia di rating S&P Global Ratings ha confermato il giudizio di rating livello BB+/B con outlook stabile.

Allegato il giudizio dell'agenzia di rating

S&P Global Ratings

(/ en_US/web/ g uest/home) Telecom Italia 'BB+/8' Ratings Affirmed; Outlook Stable

28-0ct-2019 05:14 EDT View Analyst Contact lnformation Table of Contents Relateci Criteria

Leverage at Telecom Italia SpA (TIM) will peak at 4.2x in 2019, driven by fierce competition in the domestic market after lliad's entry last year, and the lnternational Financial Reporting Standard (IFRS) 16 lease adjustment to debt.

We expect a cash flow-led decline in leverage of about 0.3x per year thereafter, thanks to reduced capitai expenditure (capex), stabilizing domestic operations, positive Brazilian contributions, and efficiency-driven margins.

We are affirming our 'BB+/B' ratings on TIM.

The stable outlook reflects our expectation that TIM will deleverage materially and sustainably below 4x in 2020, driven by of our assumption of a sharp and sustainable rebound in free operating cash flow (FOCF) to more than €2 billion fronn 2020, leaving about €1.7 billion for absolute debt reduction annually. PARIS (S&P Global Ratings) Oct. 28, 2019--S&P Global Ratings today took the rating actions listed above.

We expect adjusted leverage will temporarily peak in 2019 at 4.2x, above our range for the rating. We have decided to expand our downside rating trigger for TIM to 4x to reflect the non-operating accounting impact of IFRSl 6 on adjusted leverage, which is in line with peers, and a proforma deconsolidation of lnwit.

The increase in leverage is driven by weaker domestic EBITDA on an organic basis (pre-lFRS 16 adjustments) due to competitive pressures in the ltalian mobile market after lliad's entrance. lt also reflects higher debt arising from IFRSl 6 lease capitalization, which we expect will add about €3.6 billion to our adjusted debt figures. Although slightly offset by an accompanying EBITDA add-back of about €700 million, the net impact stili adds about another 0.1 x leverage versus 2018.

We forecast top-line revenue stabilization in 2020 and sustained lower capex driving strong cash flow-led deleveraging to levels sustainably and materially below 4x. The ltalian mobile market is stabilizing and all the main carriers have increased prices in 2019, repairing some of the market turbulence createci by lliad's entry last year. We expect recent trends of increasing mobile average revenue per user (ARPU) and declining mobile number portability will continue, allowing TIM to finish 2019 with stabilized operating trends in ltaly. We expect contributions frorn the Brazilian operations, which have been consistently strong on an organic basis, will benefit from lower macroeconomie and currency headwinds in our forecast, driving a positive net contribution to consolidateci revenue. Combined with sustainably lower capex of €3.6 billion-€3. 7 billion, incrementai profitability improvements, and reduced working capitai needs after a spike in 2019, we expect recurring FOCF before spectrum of at least €2 billion will materially deleverage TIM below 4x adjusted.

We are expanding our leverage threshold to 4.0x from 3.8x. This is both because we do not think the 2019 IFRSl 6 adjustment is reflective of a change in credit quality, and because our prior, tighter threshold was partially to offset the favorable impact of consolidating Inwit despite minority ownership. Deconsolidation

removes this need. Upon deconsolidation we will apply our operating lease adjustment to TIM's master service agreements with lnwit, increasing pro-forma adjusted leverage a further 0.1 x in 2020. This is consistent with our ratios and adjustments criteria guidance for tower master service agreements, despite their being expensed under IFRSl 6 accounting principles. However, our assumptions on dividends and proceeds from a further sell-down to 25% of lnwit ownership, as well as a deconsolidation of lnwit's IFRSl 6 debt, primarily arising from ground leases, is likely to fully offset our operating lease adjustment.

The stable outlook reflects our expectation of adjusted leverage falling materially and sustainably below 4x in 2020 and adjusted funds from operations (FFO) to debt rising to 20% from 18% in 2019-2020. lmprovements in that range will come mainly from improvements in recurring FOCF which we expect to rise sustainably toward l 0% of adjusted debt in 2020.

We could lower the rating if we no longer expected adjusted leverage to improve sustainably below 4x. This could stem from higher-than-anticipated capex or working capitai requirements that constrain FOCF below €2 billion beyond 201 9. lt could also be the result of operational factors like an unexpected return to unsustainable mobile competition that depresses ARPU or causes churn levels to spike, or from longer-term fixed-line deterioration under pressure from Openfiber. lf, contrary to our current expectations, TIM moved to relinquish contrai over its fixed-line network, we could also considera downgrade based on a weaker business profile, unless offset by materiai deleveraging.

We could raise the rating ifwe expect sustainable adjusted leverage comfortably below 3.Sx, and an increase in FFO to debt toward 25% and FOCF to debt sustainably above l 0%. Further progress in strengthening governance at the board level, such that there is long-term clarity in the company's strategie priorities, asset plans, and financial and shareholder policies, will also be required for ratings upside.

Related Criteria

Generai Criteria: Group Rating Methodology (/en_US/web/guest/article/-/view/sourceld/10999747), July l, 2019 Criteria I Corporates I Generai: Corporate Methodology: Ratios And Adjustments (/en_US/web/guest/article/-/view/sourceld/10906146), Aprii l, 2019 Generai Criteria: Methodology For Linking Long-Term And Short-Term Ratings (/en_US/web/guest/artide/-/view/sourceld/10011703), Aprii 7, 2017 Criteria I Corporates I Generai: Recovery Rating Criteria For Speculative-Grade Corporate lssuers (/en_US/web/guest/artide/-/view/sourceld/9831306), Dee. 7, 2016 Criteria I Corporates I Recovery: Methodology: Jurisdiction Ranking Assessments (/en_US/web/guest/article/-/view/sourceld/9478732), Jan. 20, 2016 Criteria I Corporates I Generai: Methodology And Assumptions: Liquidity Descriptors For Global Corporate lssuers (/en_US/web/guest/article/-/view/sourceld/8956570), Dee. 16, 2014 Criteria I Corporates J lndustrials: Key Credit Factors For The Telecommunications And Cable lndustry (/en_US/web/guest/article/-/view/sourceld/8667999), June 22, 2014 Generai Criteria: Country Risk Assessment Methodology And Assumptions (/en_US/web/guest/article/-/view/sourceld/8313032), Nov. 19, 2013 Criteria I Corporates I Generai: Corporate Methodology (/en_US/web/guest/article/-/view/sourceld/8314109), Nov. 19, 201 3 Generai Criteria: Methodology: lndustry Risk (/en_US/web/guest/article/-/view/sourceld/8304862), Nov. 19, 2013 Generai Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities (/en_US/web/guest/article/-/view/sourceld/7629699), Nov. 13, 2012 Generai Criteria: Use Of CreditWatch And Outlooks (/en_US/web/guest/article/-/view/sourceld/5612636), Sept. 14, 2009 Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. AII ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the

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