LONDON -- Standard & Poor's Ratings Services said today that more conservative financial policies and business strategies lay behind improving credit quality in the European investment-grade fixed-line and mobile telecommunications sector.At a briefing held in London today, representatives from the financial investment community gained an overview of:

As Peter Kernan, credit analyst and head of the European telecoms group at Standard & Poor's Corporate Ratings Europe, observed, management's adoption of more conservative financial policies and strategic realignment had helped repair balance sheet deterioration arising from the acquisition of expensive second-generation (2G) mobile assets, third-generation (3G) license auctions, and associated debt-financed investment funding."Over the past 18 months, issuers have turned their attention to improving operating performance, growing free operating cash flow (FOCF), and debt reduction," he said. "As a result, fixed-line and mobile FOCF have been boosted by cost and capital expenditure cuts, while the delay in the roll out of 3G has also reduced mobile risk."The strong market positions and cash flows of incumbents' fixed-line operations underpin their credit ratings. "Although voice traffic is no longer a growth area, there has been a sharp slowdown in the rate of tariff erosion and incumbent market share decline," continued Mr. Kernan. "Data and broadband services still present significant growth potential, but capital and operating efficiency remain crucial to protect fixed-line margins and cash flow."Some comfort can be derived from the lessening of competitive and regulatory risks for fixed-line businesses. The main competitive threat at present is from resellers and fixed-to-mobile migration, although all EU operators, except British Telecommunications PLC (A-/Stable/A-2) and Irish operator eircom, have a natural hedge to the latter because they own market-leading mobile operations. In terms of regulatory risk, the loosening of price caps has reduced fixed-line tariff pressure.In mobile operations, observed Mr. Kernan, the prime ratings driver is a strong, sustainable market position: "Scale matters because of i) the higher margins available for voice and short messaging service (SMS) calls between subscribers on the same network, and ii) the ability of larger operators to generate higher profits to fund fixed costs, including universal mobile telecommunications system (UMTS) roll-out. Voice revenues are now mature, SMS traffic is still growing and, as a result, 2G is delivering strong cash flows for the largest operators."Mobile regulatory risk, on the other hand, has heightened, and this, together with continued concern surrounding the likely profitability of 3G, means further mobile industry consolidation is expected. "Standard & Poor's expects that there will be a total of 59 separate networks in the EU when the subsidiaries of Hutchison Whampoa Ltd. (A/Negative/--) launch their 3G networks," said Mr. Kernan. "In Standard & Poor's view, however, the region can support only 44 networks and consolidation is likely. For example, the number of networks in The Netherlands and Germany over the medium term is expected to fall to three from five, and to three from four, respectively."Uncertainties continue to dog the 3G business model, and Standard & Poor's considers the 3G new-entrant model to be particularly vulnerable. 3G capital expenditure will be credit dilutive, given that it is not clear what incremental revenue and cash flow will be generated. Delegates also heard that improved creditworthiness might enable a number of investment-grade telecoms credits to improve their ratings, including:

Credits that remain at risk of further downward pressure, meanwhile, are those on CreditWatch with negative implications or assigned a negative outlook, namely Portugal Telecom SGPS S.A. and TeliaSonera AB (both rated A/Watch Neg/A-1), Belgacom S.A. (AA/Negative/A-1+), Bezeq - Israel Telecommunication Corp. Ltd. (foreign currency: A-/Negative/A-2), Elisa Communications Corp. (A-/Negative/A-2), and Telekomunikacja Polska S.A. (BBB/Negative/--).Mr Kernan concluded that Standard & Poor's remains comfortable with the current ratings on Deutsche Telekom AG (BBB+/Stable/A-2) in light of its strong cash flow and the obvious momentum that the company has in terms of asset disposals.Standard & Poor’s