Telefonica S.A.

This flexibility has translated into adjusted consolidated free operating cash flow (FOCF) to debt (before spectrum payments) staying at or slightly above 10%, despite earnings decline. Combined with the scrip dividend introduced for 2020, this has limited the increase in leverage that we foresee in 2020. The stable outlook reflects our expectations that Telefonica's adjusted pro rata debt to EBITDA will remain below 4.0x (based on our pro rata consolidation of Telefonica Germany, Telefonica Brazil, and Telefonica Infra; and our consolidation of 50% of the U.K. JV). We expect that the group's well-established positions and well-invested networks will support consistently robust FOCF, and gradually offset the unfavorable impact from the pandemic and currency depreciation in Latin America. We could lower

...We expect adjusted pro rata debt to EBITDA will continue to rise in 2020 to about 4.0x, from 3.8x in 2019, despite cash-flow containment. Sharp currency depreciation in major Latin American economies, combined with negative impacts from the pandemic on the group's business-to-consumer (B2C) and business-to-business (B2B) activities--due to discounts, promotions, and delays in certain B2B projects--roaming revenue, and handset sales, are heavily weighing on Telefonica's revenue and adjusted EBITDA in 2020. We forecast an approximate 10% decline year on year. We therefore expect Telefonica's adjusted pro rata debt to EBITDA will continue to deteriorate in 2020 to about 3.9x-4.0x from 3.8x in 2019. This contrasts with our previous expectation for improving credit metrics in 2020--which we viewed as a pre-requisite for Telefonica to maintain the '###' rating. Cash flow generation remains sound. Telefonica's flexibility in prioritizing its capital expenditures (capex) supports its sound cash...

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