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Moody's places Magyar Telekom BAA1 for possible downgrade

Moody's Investors Service has placed the BAA1 issuer rating in both local and foreign currencies of Hungary's leading telecommunications service provider Magyar Telekom Plc. on review for possible downgrade.
Following is Moody's statement issued late on Thursday. Moody's review of Magyar Telekoms rating will assess the extent of the current investigation being carried out by an external legal firm as well as the constraints derived from the fact that the financing banks will need to provide a covenant waiver before the end of September. In the course of the audit of the 2005 financial statements of Magyar Telekom and its subsidiaries, PricewaterhouseCoopers raised concerns regarding two contracts entered into by subsidiaries that potentially involve violations of the company's system of internal control and applicable law and regulation.

Although the total amount of these two contracts amounts to about € 3 million, Moodys is concerned about the lack of visibility in reference to the extent of the investigation as well as the potential implications arising from its ultimate resolution. Moody's will review the final conclusion of the ongoing investigation as well as the auditor's conclusions and the extent to which Magyar Telekom resolves the covenant waiver issue with financing banks. Moody's noted that absent the uncertainties derived from the ongoing investigation, it does not expect Magyar Telekom to encounter liquidity difficulties based on the strength of its operating cash flow and the support provided by its parent company Deutsche Telekom AG (A3).

In addition, the H1 2006 results show a solid operating performance which rule out any negative rating action based solely on the operating cash flow and credit metrics at this time. Magyar Telekom is the country's principal provider of telecom services. The company provides a broad range of telecom services including traditional fixed-line and mobile telephony, data transmission and value-added services. Internationally, Magyar Telekom owns a 51% equity stake in MakTel, the sole fixed-line operator and in its subsidiary Mobimak, the leading mobile operator in Macedonia. In addition, Magyar Telekom has a majority stake in Telekom Montenegro. Key shareholders of Magyar Telekom as of 30 June 2006 include MagyarCom Holding GmbH (59.21%), owned by Deutsche Telekom. The remainder, 40.79% is publicly traded. (