OREANDA-NEWS. Fitch Ratings says the failed sale of O2 UK will not affect Telefonica SA's rating (BBB+/Stable), following the EU's announcement that it will move to block Hutchison's acquisition of the British mobile operator.

Telefonica's rating is based on organic development of the business and excludes the impact of any potential M&A activities. However, a successful sale of O2 UK would have improved financial flexibility and been a big step towards the group reaching its leverage target of 2.35x net debt to EBITDA based on the company's definition (FY15: 2.91x).

Telefonica currently has no headroom within its rating, with funds from operations net leverage at the end of 2015 standing at 3.7x. This is marginally above our downgrade trigger of 3.5x. Domestic operations in Spain and the extraction of synergies from acquisitions in Germany and Brazil are progressing well, but continued weakness in Latin America due to currency devaluations combined with ongoing network investments are restraining the company's ability to deleverage in the short term based on organic cash flow generation alone.

Telefonica has a number of options to reduce leverage inorganically. It has already announced its intention to list its newly created tower and undersea cable infrastructure business Telxius, consider options for other non-core assets in its investment portfolio and continue to explore alternative solutions for its UK asset. This could be further supplemented with the issuance of hybrid securities if market conditions allow.

O2 UK is a key asset in the UK telecoms market, but executing the best value option may take time.