Moody's downgrades Portugal Telecom

Moody's Investors Service said it downgraded the senior unsecured long-term debt ratings of Portugal Telecom SGPS SA and its subsidiary Portugal Telecom International Finance BV to Baa1 from A3 following the company's announcement that it is conditionally stepping up its shareholder remuneration policy for the period to 2008 to €3 billion on an accumulated basis.

The ratings remain on review for possible further downgrade, where they were placed on Feb. 7 after Sonae SGPS announced that it was making an unsolicited offer for a controlling stake in Portugal Telecom.

Moody's said that the proposed step-up in the shareholder remuneration policy implies that Portugal Telecom will not, over the medium term in all likely scenarios, achieve the minimum financial ratios needed to maintain A3 ratings, including debt to EBITDA under 2x.

The agency acknowledged that the company plans to implement the distribution policy on the condition that the current offer is rejected by shareholders, but Moody's emphasized that this announcement makes the ratings unsustainable at their current level, as either the company will remain independent and the new distribution policy will be implemented with some weakening of credit metrics or the company's capital structure will become substantially more leveraged as a result of the current bid.

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