Moody’s: European telco credit ratings to see little impact from 5G

The introduction of fifth-generation (5G) mobile technology will be credit neutral for European telecoms operators, with no major increase in investment expected over the next five years as companies adopt a ‘wait and see’ strategy, says Moody’s Investors Service in a recently published report.

Moody’s report, “Telecoms — Europe: Limited 5G revenue growth puts major investment rise on hold over next five years,” is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release. The rating agency’s report is an update to the markets and does not constitute a rating action.

“European telecoms operators will likely remain cautious about ploughing significant cash into developing 5G infrastructure until they are certain that it will lead to higher revenues, given the industry’s lacklustre monetisation since 3G. They will instead deploy 5G gradually to limit the investment required until the business case becomes stronger,” says Laura Perez, Vice President – Senior Credit Officer at Moody’s.

Through to 2020, while spectrum investments will be the main driver of investment spending because 5G will require new unlicensed bands, such spending will be moderate. Moody’s doesn’t expect commercial deployment of 5G until 2020 in Europe, around two years later than the US and Asia. While Italy’s recent 5G auction has been more costly than Moody’s expected, the rating agency believes it would probably be the exception, rather than the norm for future European auctions.

From 2020 to 2025, European telcos are likely to focus on upgrading existing 4G networks while deploying 5G selectively. 5G revenues are unlikely to rise significantly in this five-year period as the technology will mostly apply to enhancing mobile broadband, which users would probably see as broadly similar to enhanced 4G. This phased approach will allow a faster time to market the new technology but limit investment, mitigating the financial pressure on operators.

From 2025 onwards, there is greater uncertainty about 5G revenue and spending. 5G may require significant investment as companies shift to high-frequency bands, which will require denser networks and more fibre to meet the demands of the internet of things (IoT). However, it’s not currently clear if the additional revenues will be sufficient to justify such a ramp-up in spending. As a result, companies will probably need to share networks and may have to change business models beyond traditional connectivity.

Large integrated telecoms and cable companies, such as Swisscom AG (A2 stable), Orange (Baa1 stable), Telia Company AB (Baa1 stable), Koninklijke KPN N.V. (Baa3 stable), Telefonica S.A. (Baa3 stable) and Altice International S.a.r.l. (B1 negative), are best placed to be able to build the new networks as their well-defined fibre-investment plans will reduce the spending required.

Smaller mobile-centric companies that lack major fibre infrastructure such as Matterhorn Telecom SA (B2 stable), Sunrise Communications Group AG (Ba2 stable), Wind Tre S.p.A. (B1 stable) and Play Communications S.A. (Ba3 stable), are less likely to be able to afford the investment needed.

5G will likely accelerate consolidation between fixed telecoms or cable and mobile companies as the economics of integration become even more critical. Vodafone’s proposed acquisition of certain Liberty Global plc’s (Ba3 stable) assets in Germany and the CEE region is consistent with this rationale and if it is approved next year, it would be likely to trigger a second round of in-country consolidation in Switzerland, Central and Eastern Europe and potentially in the UK.

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