OREANDA-NEWS. March 14, 2016. Deutsche Telekom's (DT) departure from its self-funding strategy of T-Mobile US with debt that is non-recourse to the parent, implies closer strategic and legal ties across the group, and reduces headroom for additional leverage within DT's current rating of 'BBB+', said Fitch Ratings. Also, we believe this move may suggest a stronger appetite for bidding in the forthcoming 600 MHz US spectrum auction than we initially expected.

DT agreed to provide USD2bn of internal funding to its 67%-owned NASDAQ-listed subsidiary T-Mobile US through a commitment to purchase non-public bonds to be issued by T-Mobile US. While this may be an exception, it suggests, in our view, that DT non-recourse (to the parent) funding at the level of operating subsidiaries is no longer a must.

Fitch estimates total spending on the 600 MHz auction could be in the mid-USD30bn to high-USD40bn range (see 2016 Outlook: North American Telecommunications and Cable). We have previously assumed that DT may spend above USD5bn in this auction. DT's propensity to invest in new spectrum may be increased by the action of competitors that have a stronger financial profile and operating scale.

While a temporary spike in debt due to spectrum purchases may be consistent with the current rating, provided that DT continues its deleveraging efforts, a substantial overspend will further stretch leverage, putting pressure on the rating. DT's leverage is already high for its rating level: we estimate it at 3.7x funds from operations (FFO)-adjusted net leverage and 3.0x of net debt/EBITDA (under Fitch's definition) at end-2015. The impact of US investment on DT's credit profile may be exacerbated by a strong US dollar relative to the euro.

DT retains a flexibility to reduce or dispose of its stake in T-Mobile US as, we believe, the group remains open to deals in the US seeking to be involved in creating a larger, and potentially more diversified operator in the US. However, a large amount of T-Mobile US's bonds on DT parent's balance sheet is likely to dilute the potential positive impact of deconsolidation on DT's leverage. Shareholder loans provided by parent DT to T-Mobile US are currently not reflected in DT group's accounts as these loans are treated as intra-group obligations and are excluded from DT's group consolidated numbers.

In a potential deconsolidation scenario, T-Mobile US's bonds would be reflected as financial investments on DT's balance sheet. Under Fitch's methodology, these investments will not be automatically treated as cash. The agency would apply a haircut to the face value of these investments, ranging from up to 100% for speculative-grade instruments and up to 20%-40% for investment-grade bonds. As a result, the positive impact of these instruments on DT's net debt will be dampened, if any at all.