OREANDA-NEWS. S&P Global Ratings today placed its 'A-' long-term corporate credit ratings on Sweden-based telecommunications operator Telia Company AB on CreditWatch with negative implications. At the same time, we affirmed our 'A-2' short-term ratings on the group.

We also affirmed the 'K-1' short-term Nordic regional scale rating on Telia.

The rating action follows Telia's recent announcement that it has received a proposal from the relevant authorities for a $1.4 billion (approximately Swedish krona [SEK] 12 billion) cash settlement of pending litigation. We consider that Telia may be unable to accommodate a potential outlay of this size at the current rating level.

Under its financial policy, Telia targets unadjusted net debt to EBITDA of "2.0x plus or minus 0.5x" and management has affirmed its continued commitment to maintaining a rating in our 'A-' to 'BBB+' range. Although we have so far understood that management intended to sustain leverage (net debt to EBITDA) below 2x, so in the lower half of its target range, we think a potential cash outlay for the proposed settlement could lead to leverage in the higher end of its target range, and to S&P Global Ratings-adjusted metrics falling short of our base-case expectations.

We intend to resolve the CreditWatch within three months. In addition to any further news on the litigation settlement, we will also reassess our base case for Telia in light of the then available latest quarterly results, any news on future dividends likely to be received from its equity associates, and any further progress toward the pending divestment of its discontinued Eurasian assets.

We could lower the ratings by one notch if we came to believe that Telia's adjusted credit ratios could not, on a timely basis, sustainably recover as we anticipate, including a free operating cash flow-to-debt ratio of about 20% in 2017, adjusted debt to EBITDA below 2.5x, and FFO to debt above 35% in 2017. Alternatively, we could affirm the ratings if current operating performance, expected dividends from equity associates, and realized and planned asset disposals could sufficiently accommodate the proposed potential settlement cash outlay within the key credit metrics we currently anticipate.