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The (Not So Good) Italian Job

24 January 2017 by lberuti

BRITEL ( BT Group Plc ) delivered a double blow to investors. It revealed that the impact of an accounting scandal in its Italian business is nearly four times worse than originally thought. From £145mln, the write down has now ballooned to £530mln. As bad as the news was, it was not the worst though! The company also issued a profit warning for this year and next, as it has begun to factor in the impact of Brexit. While individual consumers are holding up well, the UK’s decision to leave the European Union is translating into weaker demand from public sector customers in the UK and big multinationals overseas. To maintain the dividend, tough decisions will have to be made given BRITEL’s upcoming obligations on pension payments and the prospect of more intense competition for its British consumer business, now that pay-TV leader Sky Plc is offering mobile services and Virgin Media is building more fibre lines. In light of these challenges, investors knocked the stock by almost 18% and pushed BRITEL’s 5-year risk premium 9bps wider, making it one of the only names wider in the European investment grade universe. Meanwhile, the broader credit market resumed normal service after a couple of days of weakness. All credit indices closed at tighter levels today, with iTraxx Subordinated leading the charge (-10bps at 202.5bps, which is the tightest level of the current series).