DT Downgraded by Moody's

LONDON -- Moody's Investors Service has today downgraded the long-term debt ratings of Deutsche Telekom AG (DT) and its guaranteed subsidiary, Deutsche Telekom Finance B.V., to Baa3 from Baa1, and DT's short-term debt ratings to Prime-3 from Prime-2 with a stable outlook. At the same time, Moody's has downgraded VoiceStream Wireless Corp (VoiceStream), the US-based wireless operator owned by DT, to Ba3 from Baa2, with a negative outlook. The rating actions are based on our view that the financial risk will remain high for DT because of uncertainties surrounding their plans to reduce debt and because of the ongoing cash funding requirements of its 100%-owned subsidiary, VoiceStream. This concludes the rating review process initiated on 18 November 2002.The stable outlook for DT's new rating level incorporates the uncertainties surrounding DT´s future debt and cash flow levels over the next several years.The rating downgrades reflect Moody's view that DT will probably not be able to reduce its net debt to around EUR50 billion by year-end 2003, contrary to previous expectations. Moody's is aware of the company's plans to implement a number of non-core asset disposals (including the cable assets), through which DT expects to generate around EUR4 billion in 4Q 2002 through year-end 2003. Additionally, DT intends to further reduce its debt by between EUR2 billion to EUR4 billion from a partial divestiture of its extensive property portfolio in 4Q through year-end 2003. However, Moody's expects to make some adjustments adding back to DT's debt around two thirds of the total property sales, as the company will still utilise these assets through sale and leasebacks of between EUR1.3 billion to EUR2.6 billion.Also, Moody's currently adjusts DT's debt figures for off-balance sheet commitments, such as its EUR2.5 billion receivables securitisation programme, at the level of average utilisation (circa EUR1.4 billion). Whilst it is possible that DT may report a modest decline in net debt for year-end 2002 after making the adjustments mentioned above, Moody's expects DT's net debt to be close to EUR66 billion with effective leverage being significantly higher than expected 12 months ago. Therefore, even if DT were to successfully implement its stated debt reduction plan, Moody's adjusted debt is unlikely to fall below EUR56 billion during 2003. Also, whilst acknowledging the commitment of DT's management to debt reduction, the rating agency notes that market conditions remain poor and therefore factors execution risk into DT's disposal programme.On the positive side, the Baa3 rating takes account of the telecom operator's forecast of EUR5 billion to EUR6 billion worth of free cash flow for 4Q 2002 through 2003, supported by DT´s strong underlying operating performance in all four pillars of its business strategy (T-Com, T-Mobile, T-Systems and T-Online). The rating also reflects management's ability to execute its business strategy as well as DT sufficient liquidity to cover its debt maturities, and other expected cash demands until 3Q 2004, relying on cash flow and unconditional external sources of funds.Moody´s has also factored management's planned reduction in capex and the suspension of the dividend as ways to enhance free cash flow. However, Moody's notes that, although the quality of DT´s network is high and most of the investments related to GSM have been carried out, uncertainty continues to surround the longer-term impact of lower capex, which may not be sustainable in the longer term without negatively impacting upon DT's ability to fully develop an ambitious broadband strategy. Additionally, Moody's believes that DT continues to face some regulatory challenges, particularly with respect to its local fixed voice traffic in which pre-selection is expected to be introduced in February 2003.Moody's also notes that the telecom operator's major US wireless subsidiary, VoiceStream, continues to have a negative impact on DT's free cash flow, factoring capex requirements of over EUR2 billion per annum over the next three years. Moody's expects VoiceStream to have EBITDA of close to EUR500 million for year-end 2002, significantly reversing its EBITDA-negative performance in the previous year. Furthermore, while acknowledging VoiceStream's strong growth in subscribers, with close to 9 million as at 3Q 2002, Moody's noted that it has US$9billion in debt. However, Moody's believes that, in terms of new subscribers, US market growth will slow significantly earlier than that of Europe, thus achieving lower wireless penetration levels in the U.S. than in Europe in the medium term. The rating agency therefore questions VoiceStream's ability to further acquire the critical mass in the US market necessary for it to develop free cash flow generation in future years. The continuing negative cash flow impact of VoiceStream is factored into the DT rating, as Moody's believes that DT currently intends to continue supporting VoiceStream.Moody's has widened the gap between the rating of DT (the parent company) and VoiceStream's separate, unsupported long-term debt rating, downgrading VoiceStream's ratings to Ba3, with a negative outlook. The senior implied rating of VoiceStream is Ba3.Moody's considers it feasible that DT's commitment to VoiceStream could weaken in the future if VoiceStream does not become free-cash-flow-positive by 2005. While acknowledging that DT regards VoiceStream as a core business, Moody's nevertheless believes that VoiceStream is creating additional financial stresses for DT, which itself remains a highly leveraged company. Furthermore, Moody's considers a change in ownership to be possible, given the expectation of consolidation in the US wireless market, but does not expect such in the immediate future.Moody's Investors Service