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It Has Been Coming

03 May 2017 by lberuti

As recently as 2014, LMETEL ( Telefonaktiebolaget LM Ericsson) was a single A rated company. Today, after a third downgrade in less than 7 months by Moody’s, the rating agency sent it back into junk category for the first time since late 2005. Moody’s statement cited provisions and restructuring charges announced in March as the reasons why LMETEL’s credit metrics will “no longer be commensurate with investment grade rating” and added that “a strategy premised primarily on cost-cutting is not sustainable over the long run”. The management of the company has acknowledged the difficulties they are facing and they vowed to cut costs and get rid of more than $1bln of unprofitable contracts while maintaining necessary investments to prepare for the coming roll-out of the next generation of mobile networks. With the release of the Q1 results, these issues have been well flagged , and the rating announcement did not completely come out of the blue. That is why, even though LMETEL’s 5-year risk premium was marked wider during the session (+5bps at 122bps), it did not blow out. That said, since the 20th March, it has widened by 16bps while iTraxx Main has tightened by 12bps – it closed at 65bps tonight -.