France Telecom's ability to reduce debt within a relatively short period, through expected asset disposals, is materially constrained by the lower non-core asset valuations

Moody's

Moody's believe France Telecom will find it difficult to reduce its debts as quickly as it had expected.

"France Telecom's ability to reduce debt within a relatively short period, through expected asset disposals, is materially constrained by the lower non-core asset valuations [as indicated by the stock market listing of Orange]," Moody's said in a statement.

Both France Telecom and Orange have seen their debt ratings fall two notches to "A3" from "A1" - an indication that professional lenders now will be more cautious about lending to the telecoms giants.

Consequently, the companies will have to pay higher interest rates on their loans in the future.

Debt reduction

The telecoms group's 60bn euros debts arose because it borrowed to buy Orange and to buy third generation mobile telephony licences.

France Telecom had hoped to raise a vast sum of money from the Orange float in order to reduce its mountain of debt.

But in the end, the sale of Orange shares flopped; at about 9.50 euros per share the stock market float valued the company at between 46bn and 49bn euros.

That was considerably lower than the prediction made by France Telecom when in May last year it bought the original Orange from Vodafone with the aim to add its own mobile arm to the firm.

At the time, France Telecom predicted that the new unit's value would be 150bn euros.

Moody's believes that the creation of new Orange boosted France Telecom's ambition to become a leading operator in the field of mobile communication in Europe.

But "France Telecom, as well as the other incumbent telecommunications operators in Europe, is increasingly exposed to competition and its effects on operating margins and market share," Moody's said.