European telecoms: leverage heads for decade low as capex downswing continues

Europe’s telecoms operators are on course to reduce leverage to the lowest level in a decade as the capex cycle continues to turn down over the next two years, assuming no major outlays on M&A and technology.

By Nidhi Marwaha and Rohit Nair, Corporate Ratings

Modest revenue growth and heavy reliance on debt-funded capex has resulted in most telecoms companies reporting moderate to high leverage in recent years. We expect average capex to fall to 16% of revenues in 2025-2027 from a high of 25% in 2021 when outlays for 5G spectrum and licences peaked.

Guidance from Scope’s rated portfolio of 10 European telecoms companies suggests that deleveraging will be a priority. We project that aggregate net debt to EBITDA will fall to around 2.5x in 2027, from 2.7x this year and a peak of 3.3x in 2021/2022.

5G spectrum auctions accounted for between 7% and 10% of capex in 2019-22. European operators also increased capex to upgrade their networks for 5G and fibre-to-the-home. By the end of 2024, capex had enabled European operators to reach 87% of 5G household coverage, 82.5% of gigabit-capable coverage and 70.5% FTTH coverage, edging closer to the EU target of 100% by 2030.

Based on a sample of 15 large European telecom companies, we expect the reduction in average capex – 24% lower for 2025-2027 compared with 2020-2024 – to last until 2028-2029, releasing close to about EUR 30bn in cash a year.

The combination of capex normalisation and growth in free cash operating flow (FOCF) will create an opportunity for issuers to improve their credit profiles, provided they balance discretionary spending (e.g. for higher shareholder remuneration and enhanced M&A activity) with paying down debt.

This is important as deleveraged balance sheets will position companies well for the next wave of capex requirements for 6G, which will likely pick up towards the end of the decade.
Opportunity to improve credit profiles and shareholder remuneration

With reduced capex requirements, we expect most operators to allocate between 60% and 100% of FOCF to dividends and share buybacks in the next two to three years, leaving some room for deleveraging and acquisitions in segments such as fibre networks, enterprise and cybersecurity services, and artificial intelligence.

The credit profiles of telecoms companies rated by Scope are concentrated in the BBB category and have shown a consistent positive ratings drift over the last two years. We believe credit profiles will remain stable or improve further over the next few years.