Standard & Poor's cuts KPN ratings to 'BBB+' after announcement of more aggressive financial policy; outlook negative

February 8, 2006

2 Min Read

LONDON -- Standard & Poor's Ratings Services said today it lowered its long-term corporate credit, bank loan, and senior unsecured debt ratings on The Netherlands-based integrated telecommunications operator Koninklijke KPN N.V. (KPN) to 'BBB+' from 'A-', following the group's announcement of a more-aggressive redefinition of its financing policies with respect to its capital structure. The outlook is negative.

At the same time, Standard & Poor's affirmed its 'A-2' short-term corporate credit and debt ratings on the group.

"The rating action reflects the readjustment of KPN's financial policies to a more financially aggressive stance," said Standard & Poor's credit analyst Michael O'Brien. "This move marks a shift away from the group's previously more conservative financial framework and gives an indication of a future more highly leveraged capital structure."

Simultaneously, the company has announced a further share buyback program of €1 billion. This is considered aggressive by Standard & Poor's in the context of the pressure on KPN's business risk profile, which is undergoing a slow sustained erosion given the increase in competition. The recent rise in competitive pressures has required the group to be more disciplined and innovative in its business strategies and execution. A higher leverage range could, however, give the group greater financial and strategic flexibility to pursue its business objectives.

Although it remains to be seen how KPN intends to use its increased financial flexibility, Standard & Poor's considers cash-generating acquisition targets as a potentially more credit-friendly use of funds than simple share buybacks. This is dependent, however, on the group only using its financial flexibility up to the limit of its newly defined financial framework.

"The ratings on KPN could be lowered if the company reaches and consistently remain at the upper boundary of its redefined financing policy, through the use of its available resources for either enhanced shareholder returns or growth opportunities," added Mr. O'Brien. "We expect KPN to use its financial flexibility prudently while allocating sufficient resources and attention to the protection and growth of its domestic fixed-line and mobile businesses."

Standard & Poor's expects KPN to broadly maintain high free cash flow generation at levels. Furthermore, an inability to achieve a meaningful turnaround in the growth dynamic and operating performance of its German mobile operations would contribute to additional pressure on the ratings.

Standard & Poor’s

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