Approximately USD234 Million of Debt Securities Affected
Hong Kong, May 29, 2012 -- Moody's Investors Service has changed to positive from stable the outlook for Philippine Long Distance Telephone Company's (PLDT) Baa3 local currency issuer rating and foreign currency bond ratings.
RATINGS RATIONALE
The change in outlook follows Moody's decision to change the outlook for the Ba2 long-term foreign-currency rating and Baa3 foreign-currency country ceiling of the Republic of Philippines to positive from stable.
Moody's believes that since PLDT is predominantly a domestic entity with substantially all of its revenues coming from, and assets based in, the Philippines, its fundamental creditworthiness needs to closely reflect the potential risks that it shares with the sovereign.
Despite PLDT's strong fundamental credit quality, underscored by its manageable leverage and excellent liquidity, its Baa3 ratings are constrained by the two-notch differential with the sovereign rating of Ba2. But, for the moment at least, its ratings can move in tandem with the sovereign rating.
In order to be rated significantly above the sovereign, an issuer needs to be fundamentally stronger than the sovereign from a credit perspective, as well as demonstrate a degree of insulation from domestic macroeconomic and financial disruption, which generally accompanies a sovereign default.
Given the guidelines regarding the differential between government and corporate ratings (see Credit Policy paper entitled "How Sovereign Credit Quality May Affect Other Ratings', published on 13 February 2012), it is unlikely that PLDT will experience any upward rating pressure unless the sovereign rating of the Philippines is upgraded.
Alternatively PLDT would need to generate a substantially greater revenue share from outside of the Philippines, a situation that seems unlikely over the near to medium term.
"On a fundamental level, PLDT would also need to continue exhibiting strong investment-grade characteristics. In particular, it will need to maintain its existing sound financial and operating profile on a sustainable basis," says Yoshio Takahashi, a Moody's Assistant Vice President and Analyst.
Moody's would specifically like to ensure that returns for shareholders and asset investment polices do not lead to a material deterioration of the company's financial profile.
Negative rating pressure is unlikely, given the positive outlook. However, the outlook could revert to stable if adjusted EBITDA mrgins fall below 45% and/or adjusted debUEBITDA exceeds 2.0x as a result of weak operating performance or event risk. Moody's would also view negatively any additional material investment in non-core businesses.
Any downward rating action at the sovereign level would, in all likelihood, result in negative rating actions for PLDT, as Moody's would seek to maintain the current notching gap in the absence of any further credit deterioration.
The principal methodology used in rating PLDT was the Global Telecommunications Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Other Factors used in this rating are described in the Rating Implementation Guidance document: How Sovereign Credit Quality May Affect Other Ratings, published in February 2012.
PLDT is headquartered in Manila and listed on the Philippine Stock Exchange with American Depository Receipts traded on the New York Stock Exchange. It is an integrated provider of fixed-line, broadband, cellular, Information and Communications Technology and Business Process Outsourcing services. At the end of March 2012, PLDT had a market share of approximately 68% in terms of subscribers for cellular telephony, 65% for fixed-line services, and about 65% for broadband.
REGULATORY DISCLOSURES
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Yoshio Takahashi
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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