Moody's downgraded Telefonica del Peru to C due to bankruptcy filing.
Investing.com -- Moody’s Ratings downgraded Telefonica del Peru S.A.A.’s (TdP) corporate family rating (CFR) and unsecured senior ratings from Caa3 to C. This decision was made following TdP’s application for bankruptcy proceedings. The company's outlook has been revised from negative to stable.
Following this action, all ratings of TdP will be withdrawn in accordance with Moody’s policy on withdrawing credit ratings. Moody’s considers TdP’s bankruptcy filing as a default on all its debts.
This downgrade comes after TdP applied to the National Institute for the Defense of Competition and the Protection of Intellectual Property (Indecopi) for a Regular Bankruptcy Procedure (PCO) to restructure its financial obligations and tax commitments with the Superintendencia Nacional de Aduanas y de Administración Tributaria (SUNAT). Moody’s anticipates that losses for existing unsecured creditors could exceed 50%.
According to Peruvian bankruptcy law, the PCO application does not immediately suspend the company’s debt obligations. These obligations will only stop once Indecopi approves the request. Until then, TdP must continue to operate normally and meet its financial obligations. Given TdP’s weak liquidity position and lack of support from its parent company Telefonica S.A., the likelihood of a debt restructuring or distressed debt exchange leading to losses for creditors in the near term is high.
Telefonica del Peru's liquidity has significantly deteriorated in recent years due to persistent weak operational performance and a substantial tax liability currently being resolved with the Peruvian tax authority, SUNAT. Despite receiving liquidity support from Telefonica Hispanomérica, pressure on liquidity continues. Telefonica has clearly stated that the additional liquidity support of 1.55 billion PEN approved in February must be used solely for operational cash needs. Moody’s predicts that Telefonica del Peru’s free cash flow generation will remain negative at least until 2026, further straining liquidity.
The downgrade also considers governance issues, including the company’s operational history, which has been affected by profitability and market share losses since 2014. This situation has led to excessive liquidity deterioration and a high refinancing risk. These factors are reflected in the company's Financial Strategy and Risk Management assessment with a score of 5, and a general governance risk exposure (Issuer Profile Score or "IPS") of G-5. The ESG Credit Impact Score is CIS-5.
The stable outlook stems from a lengthy restructuring process initiated by the PCO application, which requires time to achieve a more sustainable capital structure. Additionally, given TdP's precarious liquidity situation and expected weak cash flow generation, no changes in the expected recovery rate are anticipated in the short term.
Despite being the largest telecommunications operator in Peru, Telefonica del Peru faces significant competition and operational challenges. Efforts to improve profitability over the last three years have not been successful, and operational costs have increased due to efforts to convert the copper and HFC network to fiber. This has not been followed by improvements in revenues. According to Moody’s, the adjusted EBITDA margin fell to approximately 7.6% by the end of 2024, a significant drop from the 25.6% achieved at the end of 2023. Moody’s adjusted leverage ratio rose from 2.3x at the end of 2023 to 7.4x by December 2024, primarily due to significant deterioration in EBITDA during this period.
The ultimate parent company of Telefonica del Peru, Telefonica S.A., has prioritized markets where it perceives long-term sustainable growth and is working to reduce its exposure to operations in Hispano America, including Telefonica del Peru. In this context, the rating does not include any financial support from the parent company.
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