S&P Cuts France Telecom Ratings

MILAN -- Standard & Poor's said today that it has lowered its long- and short-term corporate credit ratings on France Telecom(FT) to triple-'B'/'A-3' from triple-'B'-plus/'A-2'. The downgrade primarily reflects Standard & Poor's expectations that FT will acquire the 71.5% stake it does not already own in German wireless operator Mobilcom, as well as FT's inability to reduce debt sufficiently and rapidly enough to maintain credit measures consistent with the previous ratings.Standard & Poor's also lowered to triple-'B' from triple-'B'-plus its long-term corporate credit rating on Orange S.A., FT's majority-owned wireless subsidiary. The long-term ratings on both companies remain on CreditWatch with negative implications, where they were placed on March 28, 2002, reflecting FT's challenging refinancing needs, including EUR15 billion of financial obligations in 2003."Although expected to be financed through an Orange share exchange, the acquisition of a loss-making business in the very competitive German market, combined with FT's sharp stock-price decline -- reducing the value of treasury stock to be sold -- will affect the group's debt-reduction targets and credit measures over the next two years," said Guy Deslondes, a director in Standard & Poor's Milan office.FT's debt-reduction efforts will also suffer from very depressed market conditions and asset valuations. Consequently, the sale of the group's 50 million treasury shares and other telecoms assets will likely generate lower cash proceeds than anticipated. Other asset disposals may proceed as planned, but, overall, FT's debt reduction will be slower and more limited, resulting in depressed credit measures for longer than expected. Another debt-reduction lever--free cash flow generation--could be challenged if operating margins in FT's core domestic wireline division decline. Standard & Poor's expects FT to cut investments aggressively to maximize cash flow generation.Standard & Poor’sFrance Telecom SAOrange SA