(December 21 – 10:00 ET) – Moody’s Investors Service says that extensive lending by European banks to telecoms constitutes a credit concern, but should not lead to a banking crisis.

Moody’s says it isn’t contemplating downgrades for European bank ratings solely because of telecom exposures. “The concerns about European banks’ lending to this sector have been amplified by the slippage in the telecom industry’s credit fundamentals; by significant drops in telecom share prices; and more recently by regulatory warnings,” says Sam Theodore, Moody’s global banking co-ordinator.

There are also other risks such as poor market conditions drying out other sources of financing, delaying transactions and making them on poor terms for the telecoms. “Both these issues amplify the risk exposure and raise legitimate questions about large banks’ appetite, or the lack thereof, for renewing some of these facilities.”

Moody’s says it believes that it is mostly large global banks that have the greatest telecom exposures, which require financing to pursue growth and diversification through mergers and acquisitions, fund the cost of licenses for third-generation mobile telephony, and to build the necessary new infrastructures. “With respect to these borrowers, sharp drops in share prices, or even widening spreads on bonds, do not necessarily signal a terminal illness.”

Moody’s has downgraded some of the large telecoms, but says they are still considered to be investment grade. “Ultimately, an asset-quality crisis will be the consequence of borrowers defaulting on loans, and, at this stage, Moody’s is not forecasting defaults by major telecoms,” it says.

“However, a general slippage of the telecom sector could trigger a more structural crisis. In such a scenario, the recurring earning power of an exposed bank remains critical — that is, the ongoing ability to cushion any credit hits with an adequate level of pre-provision profits.”
-IE Staff