August 11, 2011 / 12:41 PM / 8 years ago

UDPATE 2-S&P cuts Telefonica credit rating

* Long-term rating down to BBB+ from A-

* Rating cut on lower revenue, cash flow expectations

* Downgrade had been predicted after first-half results

* Shares down, underperform blue-chip index (Updates shares, adds details, analyst, byline)

By Judy MacInnes

MADRID, Aug 11 (Reuters) - Standard and Poor’s Rating Services cut Spain’s Telefonica’s long-term rating to BBB+ from A- on Thursday, a move forecast by some analysts after first-half results.

S&P said the downgrade was due to lower expectations for revenue and cash flow growth at the euro zone’s largest telecommunications company.

“Taking into account what we consider an aggressive dividend distribution policy, we think that debt leverage reduction will fall short of our earlier expectations,” the rating agency also said in a statement.

Telefonica suffered a decline in first-half profit as consumers in Spain, suffering the impact of a recession which has left one in five out of work, switched to cheaper providers, and regulators in Latin America pushed tariffs lower.

Many analysts have argued the company’s ambitious dividend policy is unsustainable, with its businesses in Britain, Mexico and Venezuela also turning in a lacklustre performance in the first six months.

“The credit rating downgrade from S&P is not totally unexpected,” a telecoms analyst at a Spanish bank said.

“Telefonica’s debt pile of around 60 billion euros ($85 billion) is still hefty,” he said.

The company said last month it hopes to meet its target of a debt-to-EBITDA ratio of below 2.5 by end-2011.

Shares in Telefonica fell 1.01 percent by 1310 GMT, recovering from a steeper drop right after the downgrade but still underperforming Spain’s blue-chip IBEX .

$1 = 0.705 Euros Additional reporting by Bangalore Ratings Team; Editing by Jonathan Gleave and David Hulmes

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