S&P Rates Greece's OTE Negative

LONDON -- Standard & Poor's Ratings Services said today it revised its outlook on Greek telecommunications operator Hellenic Telecommunications Organization S.A. (OTE) to negative from stable, following heightened uncertainty concerning the materiality and timing of the agreement that is being sought to restructure the cost base of the company's domestic fixed-line division.

At the same time, Standard & Poor's affirmed its 'BBB+/A-2' corporate credit ratings on OTE, and its 'BBB+' senior unsecured debt rating on related entity OTE PLC.

OTE is currently negotiating with its workforce unions to agree a scheme of headcount reduction. Standard & Poor's recognizes the rationale for structural cost and headcount reduction, but notes that potentially substantial restructuring payments could impair the group's financial profile beyond initial expectations, at least in the short-term.

The lack of adequate cost restructuring to date has resulted in depressed margins and weak cash generation in the group's core fixed-line division. The ratings assume that timely and successful steps will be taken to at least stop this trend. OTE reported total debt of €3.2 billion ($4.2 billion) at Sept. 30, 2004.

"Our concern is that, in addition to some delay to an agreement being reached, the magnitude of the payments discussed--of potentially €1.0 billion to €1.6 billion--is well in excess of earlier expectations," said Standard & Poor's credit analyst Simon Redmond. "Consequently, as and when an agreement is reached, we will review the scheme with a particular focus on the balance between the schedule of payments and concomitant funding implications, and the amount and timing of anticipated cost savings, to determine whether the combined effect on the group remains consistent with the ratings."

The negative outlook acknowledges the risk that OTE's credit profile is coming under increasing pressure. The group's failure to address key issues successfully in the very near term could lead to a negative rating adjustment. Alternatively, the funding of a very substantial restructuring commitment over a short period of time would significantly affect OTE's financial flexibility, possibly resulting in a downgrade--potentially in spite of the benefit of a lower cost base in the future. Additional investment activity or other management diversions from strategic priorities would also be viewed negatively.

Standard & Poor’s