Telecom Italia SpA

The stable outlook reflects our expectation of adjusted debt to EBITDA falling materially and sustainably below 4x in 2020 and adjusted funds from operations (FFO) to debt rising to 20% from 18% in 2019-2020. Improvements in that range will come mainly from improvements in recurring FOCF, which we expect to rise sustainably toward 10% 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 capital requirements that constrain FOCF below €2 billion beyond 2019. It 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,

...We forecast strong cash flow-led deleveraging to levels sustainably and materially below 4x in 2020. All the main carriers in the Italian mobile market have increased prices in 2019, helping to stabilize conditions after the market turbulence created by Iliad's 2018 entry. We expect increasing mobile average revenue per user (ARPU) and declining mobile number portability will allow Telecom Italia to finish 2019 with stabilized operating trends in Italy. Lower macroeconomic and currency headwinds in Brazil drive a positive net contribution to consolidated revenue in our forecast. Combined with sustainably lower capital expenditure (capex) of 3.6 billion-3.7 billion, incremental profitability improvements, and reduced working capital needs after a spike in 2019, we expect recurring FOCF before spectrum of at least 2 billion. We expect adjusted leverage will temporarily peak in 2019 at 4.2x, above our range for the rating. The increase in leverage is driven by weaker domestic EBITDA on an...

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