Fitch Ratings has downgraded Telefonica's long-term issuer default rating and senior unsecured rating to 'BBB' from 'BBB+'. The outlook on the IDR is stable.
Fitch says the rating downgrade reflects expectations that Telefonica is unlikely to reduce leverage on an organic basis during 2016 as the agency originally envisaged.
Fitch says this is due to higher-than-expected pressure on funds from operations (FFO) resulting from a combination of restructuring charges, FX depreciation and weaker performance in the group's Hispam division.
Fitch now expects FFO-adjusted net leverage is likely to peak end-2016 at 3.9x, or 0.4x higher than its previous forecast, before declining to 3.5x by 2018 as a result of growth in organic free cashflow. This leverage profile is more consistent with a 'BBB' rating.