Telefonica S.A.

S&P Global Ratings' stable outlook on Spain-based integrated telecoms operator Telefónica S.A. reflects its expectation that Telefónica will maintain FOCF to debt above 8% after spectrum investments, and reduce adjusted leverage to less than 3.3x in 2019 and further thereafter. (We think that pro rata for the partial ownership of subsidiaries in Germany and Brazil, and Telxius, adjusted leverage would be 0.2x-0.3x higher.) We expect that the group's well-established positions will continue to support consistently robust FOCF, leading to positive DCF after shareholder distributions and providing some means to reduce debt, complemented by positive tax and asset disposal proceeds in 2019. We could lower the rating by one notch if we came to believe that deleveraging would fall short of

...Telefonica's actual deleveraging track record has been weak in our view, but a clear and continuous financial policy commitment should support improvements in 2019. The adjusted debt-to-EBITDA ratio climbed above the 3.3x maximum guideline for the ratings in 2018, as the group's EBITDA was held back by heavy content costs, currency translation impacts in Latin America, and restructuring costs. These pressures on reported EBITDA have offset the benefits of a reduction in absolute debt. The slow pace of reduction in underlying leverage makes the group's credit measures susceptible to external factors like currency swings and to operating setbacks or one-off costs such as for spectrum. However, we expect that management's continuous commitment to cutting debt will bear fruit this year. The combination of positive DCF and cash proceeds from recent asset disposals and a one-time tax refund should translate into steadily improving metrics in 2019, with some further organic deleveraging capability...

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