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Investing.com -- Moody’s Ratings has lowered the corporate family rating (CFR) and senior unsecured ratings of Telefonica (NYSE:TEF) del Peru S.A.A. (TdP) to C from Caa3 on March 10, 2025. This decision was made following TdP’s filing for bankruptcy procedures. The outlook for the company has been revised to stable from negative.
After this action, all TdP’s ratings will be removed, in line with Moody’s policy for withdrawing credit ratings. Moody’s regards TdP’s bankruptcy procedure filing as a default on all its debt.
This downgrade comes after TdP filed for Ordinary Bankruptcy Procedure (PCO) before the National Institute for the Defense of Competition and the Protection of Intellectual Property (Indecopi) to restructure its financial obligations and tax commitments with Superintendencia Nacional de Aduanas y de Administración Tributaria (SUNAT). Moody’s predicts that losses to existing unsecured creditors could exceed 50%.
Under Peruvian bankruptcy law, the PCO petition does not immediately suspend the company’s debt obligations. These obligations will be halted once Indecopi approves the request. Until that time, TdP must continue to operate as usual and meet its financial obligations. Given TdP’s weak liquidity position and lack of support from its parent company, Telefonica S.A., there is a high likelihood of a debt restructuring or a distressed debt exchange soon, leading to losses for creditors.
Telefonica del Peru’s liquidity has significantly worsened over recent years due to consistently weak operating performance and a large tax liability currently being settled with the Peruvian tax authority, SUNAT. Despite receiving liquidity support from Telefonica Hispanomérica, liquidity remains under pressure. Telefonica has explicitly stated that the additional PEN1.55 billion in liquidity support approved in February must be strictly used for operational cash needs. Moody’s estimates that Telefonica del Peru’s free cash flow generation will remain negative at least until 2026, further straining liquidity.
The downgrade also takes into account governance considerations, including the company’s operating track record, which has been impacted by loss of profitability and market share since 2014. This has resulted in extreme liquidity deterioration and high refinancing risk. These factors are reflected in the company’s Financial Strategy and Risk Management assessment of 5, and the overall exposure to governance risks (Issuer Profile Score or "IPS") of G-5. The ESG Credit Impact Score is CIS-5.
The stable outlook is due to the extended restructuring process initiated by the PCO filing, which will require time to achieve a more sustainable capital structure. Furthermore, given TdP’s precarious liquidity situation and expected weak cash flow generation, the expected recovery rate is not anticipated to change in the short term.
Despite Telefonica del Peru’s position as the largest telecommunications operator in Peru, the company faces significant competitive and operational challenges. Efforts to improve profitability over the last three years have not been successful, with operating costs increasing mainly due to efforts to convert its copper and HFC network to fiber. This has not been followed by improvement in revenues. Moody’s-adjusted EBITDA margin dropped to about 7.6% as of year-end 2024, which is a significant decrease from the 25.6% achieved as of year-end 2023. Moody’s adjusted leverage has increased to 7.4x as of December 2024 up from 2.3x at year-end 2023, mainly due to the significant EBITDA deterioration over the period.
Telefonica del Peru’s ultimate parent company, Telefonica S.A., has prioritized markets where it perceives long-term sustainable growth and has worked to reduce its exposure to businesses in Hispano America, including Telefonica del Peru. Given this context, the rating incorporates no financial support from the parent.
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