Telecom Italia cut to junk

Telecom Italia became the latest Italian company to lose its investment grade status after it was downgraded to Ba1 by Moody's.

The rating agency cited the firm's deteriorating balance sheet and uncertainty over its ability to strengthen its financial position. The resignation of its chief executive officer last week hasn't helped its cause.

However, credit markets didn't panic after the downgrade; on the contrary, Telecom Italia's spreads tightened 5bps to 360bps following the news. The company already traded with an implied rating of 'B', according to Markit data, so the cut to junk status probably won't have come as a surprise to the markets.

The sanguine reaction may have also resulted from expectations that Telecom Italia will sell its controlling stake in Brazilian wireless carrier Tim Participacoes. A sale could raise in the region of €10bn and would bolster the firm's balance sheet, at least in the short-term.

Portugal Telecom recently announced a merger with a Brazilian affiliate and Telefonica, a major shareholder in Telecom Italia, is thought to be in favour of a disposal.

But it does raise questions about the Italian firm's long-term strategy. Telecom Italia is heavily dependent on the competitive and low-growth domestic market, and selling its Brazilian assets will only increase its exposure to Europe.

The broader market was uneventful, as it has been all week, with Alcoa's (280bps, -18) solid results providing some welcome good news. However, the ceo warned that the looming threat of a US government default was a "giant taser" affecting business confidence.

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