Capital Structure Strategy
and
New IFRS for 2018
Telefónica Group
23 March 2018
Finance and Accounting session
Pablo Eguirón
Global Director of Investor Relations
Key Objectives
Laura Abasolo
Chief Financial and Control Officer
4
Key Objectives
Capital Structure Strategy New IFRS for 2018
Implications and main changes of new
accounting standards
Cost optimization across capital structure
Interest rates and FX volatility management
Guarantee Solvency and Liquidity
Capital Structure Strategy
Jesús Romero
Deputy Chief Financial Officer
6
5.6
15.5
4.4
1.2
3.3
1.0
USD Bonds € Bonds Latam
Financing
Hybrids Bank
Financing
Total
(€bn)
Sources of long-term financing (FY 17 & 2018 YTD)
Long term financing strengthened our balance sheet in 2017 and YTD
7.3
20.913.5
Cash position Undrawn credit
lines & synd.
credit facilities
Liquidity position
Liquidity position (Dec-17)
(€bn)
92% LT
(1.4)
5.8 6.2
2018E 2019E 2020E
(€bn; not considering hybrid NC dates)
Net Debt maturities (March 2018 PF with 2018 YTD issues )
Avg. debt life of
9.3Y expected in Q1
2018 (6.4Y in 2016)
Interest payments cost (Dec-17)
3.94%
3.32%
(0.40%)
(0.22%)
Dec-16 Europe Latam Dec-17
71% of debt in
fixed rates
(51% in 2016)
<€100mn interest
payment sensitivity to
+100bps in rates
(>€225mn in 2016)
Source: Telefónica
(0.62 p.p.)
7
Key Finance objectives – guarantee solvency and liquidity
Meet key objectives while optimizing costs across our capital structure
1. Fully committed to a solid investment grade credit rating (BBB/Baa2)
2. Current liquidity covers debt maturities in excess of two years
3. Manage and hedge main risks – focus on interest rates and FX
8
Capital structure breakdown and pricing of debt vs. equity
1. Hybrids valued at issuance date
2. Data as of 20/03/2018. Source: Bloomberg
3. FCF ex spectrum plus financial payments net of taxes and adjusted for minorities
4. Assuming TEF’s effective cash tax rate of 21.9% Source: Telefónica
44.2
96.2
4.3
7.5
41.5
-1.3
Reported Net
Debt
Net Employee
Commitments
Hybrids Market
Capitalization
Minorities Enterprise Value
1
2
€bn
FCF ex spectrum &
unlevered FCF (€m)
5,300 6,5593
Post-tax
Cash Yields
(%)
6.82%
(unlevered FCF yield)
3.32%
2.59%
5.00% (Div. yield)
12.77% (FCF yield)
Pre-tax
Post-tax4
5.34%
4.17%
4.41%
3.45%
Pre-LM Post-LM
Interest & Dividend
outflows (€m)
2,077
(€40c/share)1,726 354
In six quarters, TEF refinanced €19bn at historically
low rates and long tenors, equivalent to 34% of total
debt plus hybrids and 20% of enterprise value
ND decreased
by -€4.4bn yoy in
2017
9
Historical trend in financial payments and key trade-offs in costs
2.4
2.5
2.4
2.1
1.7
4.7%
5.4%
5.0%
3.9%
3.3%
2.0%
3.0%
4.0%
5.0%
6.0%
1.6
1.9
2.2
2.5
2.8
2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17
Total financial payments cost (RHS)Total interest payments (€bn) (LHS)
€bn
Rates
2,143
-€417m
(∆ 1Y)
1,726Total Interest
Payments
(€m - 12M Rolling)
2,530
-€804m
(∆ 3Y)
AVERAGE MATURITY:
low maturities = lower cost;
in context of rising interest
rates, preferable to increase
average debt life
1 2 3
FX MIX: cost in euros are
lower than in LatAm currencies;
consider expected FX changes
and compare extra financial
cost vs. FX impact on principal
FLOATING vs. FIXED RATES:
floating = lower cost; in context
of rising interest rates, safer to
increase weight of fixed rate
debt
Source: Telefónica
10
Current market value of senior bonds - €39bn vs. notional €37bn
TEF inventory of listed fixed income instruments by currency
Source: Bloomberg. Data as of March 20th
Senior
EUR
GBP
USD
Bond issues in
2017-18 YTD
Years to maturity
-1
0
1
2
3
4
5
6
Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 17Y 18Y 19Y 20Y … 30Y
Y
ie
ld
to
m
aturi
ty
(%
)
11
Credit market depth is critical, specially in long tenors
0
25
50
75
100
125
<5yrs 5-7yrs 7-10yrs >10yrs
0
50
100
150
200
250
<5yrs 5-7yrs 7-10yrs >10yrs
0
5
10
15
20
25
<5yrs 5-7yrs 7-10yrs >10yrs
Total Corporate IG issuance1 in 2017 – 300bn in EUR, 728bn in USD and 36bn in GBP
Maturity breakdown
EUR GBPUSD
1. Source: UBS Corporate Debt Capital Markets
2. Floating rate note (Euribor 3m + 40 bps)
Source: Telefónica
9.5
1.48%
6.5
19.0
5.6
1.2
3.3
2.5
€ Bonds USD Bonds Latam
Financing
Hybrids Bank
Financing
Total
10Y
€1.4bn
20Y
€0.8bn
30Y
€3.4bn
TEF: clear focus of long-term financing in last six quarters (between October 16 to March 18 in €bn)
Years
Yield
1.25
6.5
0.75 0.15
1.25
0.5 0.15
2 0.2
1.25
1.0
Oct-16 Oct-16 Dec-16 Jan-17 Jan-17 Jan-17 Mar-17 Sep-17 Jan-18 Total
11.75
2.32%
9
1.45%
10.4
1.72%11.5
2.32%
4
0.32%
15
1.93%
35
4.00%
8
1.53%
12
$1,250m Interest Rate Swap (IRS) to shift fixed USD debt
to floating1
Derivatives – turn a 30Y USD coupon of 4.895% into 3.17% in €
1. Assuming FX USD/EUR=1.222
Same steps used to turn 20Y USD bond with a fixed coupon of 4.665% into a 20Y EUR “synthetic” bond with a fixed coupon of 2.87%
$1,250m
Currency Interest Rate Swap (CIRS) to hedge TEF
margin credit risk (spread)
3
€1,022m1
Interest Rate Swap (IRS) to shift floating EUR
debt to fixed
4
ISSUE 30Y USD bond with a fixed coupon
of 4.895% (maturity March-2048)
$1,250m
Notional Currency Coupon (%) HEDGING ACTIVITY
RESULT 30Y EUR “synthetic” bond with a fixed coupon of
3.17% (maturity March-2048)(1.58% + 1.52% + 0.07%)
€1,022m1 EUR Fixed (30Y Swap + TEF spread +/- basis spread) Pay out
INITIAL AND FINAL NOTIONAL EXCHANGE
$1,250m Currency Interest Rate Swap (CIRS) to hedge FX and
basis (spread) risks due to notional exchange
2(basis spread + 0.07%)(basis spread + 0.07 )
13
Trade offs (1) – increased average debt life (6.4Y to 9.3Y in 5Qs)
1.Includes Cash position and undrawn credit lines & syndicated credit facilities
Source: Telefónica
Avg. Debt maturity was 6.4Y (Dec-16) vs. current 9.3Y (Mar-18 PF with 2018 YTD issues) - €bn
6.2
4.9 5.8 5.8 5.1
2.0
1.1
0.9
1.9
0.6
1.0
1.0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 >2030
6.4
2.2
1.3
5.4
7.4
5.8 6.1
2.6
1.3
7.7
0.6 0.3 0.3
December 2016 (Liquidity1: €21.3 bn)
€18.5bn debt maturities
(+90.8% vs. Dec-16)
Perpetual bonds
5.8 6.2 5.7 5.2
2.6
1.3 1.9
0.7 0.8 0.3 1.0
2.3
1.0
1.0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 >2030
6.0
2.3 2.9 2.1
1.1
-1.4
6.5 7.0 6.2
4.8
1.7 2.0 1.3
7.3
March 2018 PF with 2018 YTD issues (Liquidity1: €20.9bn as of Dec-17)
Perpetual bonds
€9.7bn debt maturities
3.0
3.7
14
Trade offs (2) – increased fixed vs. floating rate debt
7.4
6.8
5.7 5.6
6.4
7.9 8.1
4.7%
5.4%
5.0%
4.6%
3.9%
3.5%
3.3%
0.2% 0.2%
0.0%
-0.2% -0.3% -0.3% -0.3%
1.6%
2.2%
0.9%
0.5%
0.3%
0.7%
0.9%
2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17
Total financial payments
costs
Avg. Debt maturity (yrs)
EUR Swap 3M
EUR Swap 10Y
Sensitivity to +100bps
in interest rates (€m)
+118 +111 +232 +91+245∆ +134m ∆ -13m ∆ -141m
% of Debt in Fixed
Rates
71% 70% 48% 51% 71%∆ -22 p.p. ∆ +3 p.p. ∆ +20 p.p.
2013 2014 2015 2016 2017
15
Trade offs (3) – FX hedging strategy produced positive results
Revenues (-€1,653m)
OIBDA (-€717m)
FCF (-€171m)
Net Debt (-€639m)
FX reduces OpEx FX reduces CapEx,
Taxes & others
FX reduces
Net Debt
FX impact in FCF is mitigated, “natural
hedge”
Debt structure more than offsets FCF
impact
(616)
(103)
(611)
OIBDA FCF Net Debt
(1,175)
(166) (91)
OIBDA FCF Net Debt
(717)
(171)
(639)
OIBDA FCF Net Debt
2015 (€m) 2017 (€m)2016 (€m)
0.97 0.90
Total Europe
ex-financial payments
Dividend
FCFS 2017 (€)
2017
Total interest payments
(before taxes)
…exceeds dividends
and interest
payments…
European FCF
significantly…
…LatAm is all
upside
16
Levels of FX debt constantly monitored relative to FX fair value views
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Fair Value
(+/- 1 st. dev.)
Illustrative case study: BRL/USD spot rates relative to equilibrium levels
PPP: Purchasing Power Parity
PPP since Jan'16
PPP since Jul'11
UNDERVALUATION
Decrease debt in BRL
OVERVALUATION
Increase debt in BRL
17
FX hedging in 2016 – decision making based on economic profit analysis
FX Impact on
net debt
A
(€m)
GBP
BRL
Rest
TOTAL -91
Financial impact of bringing
Net Debt/OIBDA to benchmark
B C
Financial
Expenses
FX impact on
new debt
+380 +337
Theoretical impact
under benchmark
A CD + +B=
+626
Economic
Profit
AD -
€717m
18
Executed 1st large EU hybrid liability management; annual savings >€60m
1St Call Date (currency) NOTIONAL (€m) Years to Call COUPON (%)
Sep-18 (EUR) 1,125 0.49 6.50%
Dec-19 (EUR) 850 1.70 4.20%
Mar-20 (EUR) 750 2.02 5.00%
Nov-20 (GBP)1 685 2.68 6.75%
Sep-21 (EUR) 625 3.49 7.625%
Mar-22 (EUR) 1,000 3.98 3.75%
Jun-23 (EUR) 1,000 5.21 2.625%
Mar-24 (EUR) 1,000 6.03 5.875%
TOTAL TEF Holding 7,035 3.23 5.16%
Mar-202 (USD) 417 1.94 8.5%
TOTAL TEF Group 7,452 3.16 5.34%
Hybrids Pre-LM Hybrids Post-LM
1St Call Date (currency) NOTIONAL (€m) Years to Call COUPON (%)
Sep-183 (EUR) 0 0.49 0
Dec-19 (EUR) 705 1.70 4.20%
Mar-20 (EUR) 592 2.02 5.00%
Nov-20 (GBP)1 196 2.68 6.75%
Sep-21 (EUR) 293 3.49 7.625%
Mar-22 (EUR) 1,000 3.98 3.75%
Sep-23 (EUR) 2,250 5.21 2.833%
Mar-24 (EUR) 1,000 6.03 5.875%
Sep-26 (EUR) 1,000 8.51 3.88%
TOTAL TEF Holding 7,035 4.86 4.17%
Mar-202 (USD) 417 1.94 8.5%
TOTAL TEF Group 7,452 4.70 4.41%
1. FX: 0.88 GBP/EUR
2. COLTEL Hybrid (FX: 1.20 USD/EUR)
3. €473m outstanding; assumes exercise at first call date (Sept 18)
19
Implied costs of equity component of recently issued hybrid bonds
NOTIONAL COUPON (%) COST (€m)
Hybrid 1,000 2.625% 26.3
EUR senior 500 0.40% 2.0
Equity 500 4.85% 24.3
Implied cost of Equity (post tax1) 3.79%
NOTIONAL COUPON (%) COST (€m)
Hybrid 1,250 3.0% 37.5
EUR senior 625 0.95% 5.9
Equity 625 5.05% 31.6
Implied cost of Equity (post tax1) 3.95%
NOTIONAL COUPON (%) COST (€m)
Hybrid 1,000 3.875% 38.8
EUR senior 500 1.64% 8.2
Equity 500 6.11% 30.6
Implied cost of Equity (post tax1) 4.77%
A Hybrid Dec-17 (5.5Y) B Hybrid Mar-18 (5.7Y) C Hybrid Mar-18 (8.5Y)
Consider hybrids as attractive long term components of our capital structure
1. Assuming TEF’s effective cash tax rate of 21.9%
Source: Telefónica
20
Main takeaways
Stronger balance sheet and solid track record of risk management
Objectives – guarantee solvency and liquidity; solid investment grade credit rating (BBB/Baa2)
Hedge interest rate and FX risks while optimizing capital structure costs
In 2017 we strengthened our balance sheet ahead of potentially higher interest rates
Refinanced €19bn since Oct 2016, equivalent to 34% of total debt and 20% of enterprise value
Q1 2018: issued €3bn in senior bonds, executed €2.25bn hybrid LM and refinanced €5.5bn RCF
New IFRS for 2018
Marta Soto
Head of Accounting Policies
22
Overview
23
23
EFFECTIVE DATE…
… January 1st 2018
… Partial Retrospective approach
adopted by Telefónica
CORE OF THE STANDARD…
… Revenue recognition is based on the
contract with the customer and is not
necessarily aligned with billing
CHANGES IN REVENUE
RECOGNITION…
… New revenue mix
… Variations in timing of revenue recognition
AND IN SOME COST
RECOGNITION…
… Certain costs of customer
acquisition have to be capitalized
Replacing various different standards on revenue recognition. IFRS 15 delivers a unified accounting model
across industries ensuring…
Higher comparability
Higher consistency
Major changes and
implications of the new
standard
IFRS 15: The new revenue standard
IFRS15
IMPACTS (*):
Opening pre-tax equity 2018:
€+1.0 Bn
Estimated P&L impact based
on FY17:
• Revenue: €-60 Mill
• OIBDA: €-80 Mill
(*) Unaudited figures
24
24
• Financial Assets Classification based on:
o Business model
o Contractual Cash Flow Characteristics
• Financial Assets Measurement:
o Fair Value through profit and loss (FVtPL)
o Fair Value through other comprehensive income (FVtOCI)
o Amortised Cost (AC)
• We move from an incurred loss model to a new impairment model
based on EXPECTED CREDIT LOSSES
• Objective: To reflect the pattern of deterioration or its
improvement
Classification &
Measurement
Impairment
• Simplification of IAS 39 requirements but higher volume of information
about the activities carried out by the Entity regarding risk
management
• Objective: To align hedge accounting with risk management
Hedge Accounting
Main changes
IFRS 9: Financial Instruments
Opening pre-tax equity
impact 2018: €-200 Mill
No relevant impact
expected in P&L FY18
25
IFRS 15 in detail
26
26
Applying a 5 Step Model
to determine when and
how to recognise
revenue
IFRS 15: The model
when a performance obligation is
satisfied by transferring the
good or service to the customer
Recognising revenue
To each performance obligation based on the
relative standalone selling price
Allocating the transaction price
The amount to which an entity expects
to be entitled in exchange for
transferring promised goods or
services to a customer
Determining the transaction price
- Good or services that are distinct; or
- A series of specified goods or services substantially the same
with same pattern of transfer to the customer
Identifying performance obligations
Identifying the
contract
Identifying the
contract
Identifying
POs
Determining
TP
Allocating
TP
Recognising
revenue
5 steps
Other aspects: Cost Capitalization
Capitalization of incremental costs for
obtaining a contract if the amortization period is
over 12 months long
Areas of major impact
for Telefónica
Agreement that
creates enforceable
rights and
obligations
27
27
Before… …After
R
e
ve
n
u
e
Months
200 150 150 150 150 150
Handset
revenue
Service
revenue
Revenue Billing Revenue Billing
The difference is reflected in the Balance Sheet
740
Balance Sheet Impact
Months
Months
C
o
n
tr
a
ct
A
sse
t
P&L Impact
Cash conversion over
the contract term
120 120 120 120 120
R
evenue
sS./150 per month
during 18 months
Total = S./2,700
Handset Price with service(*) S./200
Total Contract = S./2,900
Step 4 implications through
an example…
… affecting those offers with
a discount on the handset or
the service, or both
IFRS 15: Basic Adjustment
Key points
Total revenue of contracts is the same
Time of recognition differs
Revenue mix changes
New B/S items: contract assets and
contract liabilities
540
510
480
450
420
0
…
…
…
SSPR = S./740
(*) SSP = S./925
28
28
Before… …After
Months
Months
Expen
se
s
C
a
p
italized
co
st
s
Expen
se
s
Months
30
1.25 1.25 1.25 1.25 1.25 1.25
One shot
recognition
OPEX accrual in accordance
with the pattern of
transfer of the services
P&L Impact
IFRS 15: Cost Capitalisation
Incremental costs have to be
capitalised if the entity
expects to recover those
costs
Let’s see an example…
A dealer is paid a commission
of 30 € for a new contract
with a customer. The total
duration of the contract is 24
months
…
…
OPEX accrual over the
total term of the
contract
28.75
27.50
26.25
25.00
23.75
0
Balance Sheet Impact
P&L Impact
Key points
Sales commissions with deferral
period longer than 12 months
New B/S item: Capitalized costs
29
29
IFRS 15: Opening equity impact 2018
30%
70%
5%
4%
38%
36%
5%
12%
Areas of impact Segment Distribution
Capitalised costs
Contract Assets & Contract Liabilities
UK
North Hispam
South HispamGermany
Brazil
Spain
The following charts
represent the estimated
equity impact on a pre-tax
basis of €+1.0 Bn distributed
by areas of impact and
segments
Unaudited figures
30
30
1 North HISPAM: Colombia, Mexico, Costa Rica, El Salvador, Guatemala, Nicaragua, Panama, Ecuador and Venezuela
2 South HISPAM: Argentina, Peru, Chile and Uruguay
IFRS 15: Estimated contribution per region
OIBDARevenue
South HISPAM 2
North HISPAM 1
Germany
UK
Spain
Brazil
Estimated P&L impact
based on FY17
Unaudited figures Total Group
Revenue: € -60 Mill
-0.1% over Revenue
OIBDA: € -80 Mill
-0.5% over OIBDA
Non-relevant
impacts in any
segment
Key Takeaways
Laura Abasolo
Chief Financial and Control Officer
32
32
Key Takeaways
Capital Structure Strategy New IFRS for 2018
No material impacts expected
-0.1% Revenues and -0.5% OIBDA (estimated impact based on FY17)
Healthier Balance Sheet
Solid risk management track record
Impressive refinancing exercise: €19bn
Guidance not affected under new standards
Q&A Session
Laura Abasolo
Jesús Romero
Marta Soto
Pablo Eguirón
Appendix
35
TRANSITION
PORTFOLIO
APPROACH
FINANCIAL
COMPONENT
Telefónica Group will use portfolios
as a method of clustering similar
contracts. wherever possible
Telefónica Group will not require the
calculation of the financing
arrangement for those commercial
offers where the customer pays for
the good or service in one year or
less
COSTS
MODIFIED
CONTRACTS
COMPLETED
CONTRACTS
For modified contracts, Telefónica
Group will not evaluate separately
the effects of the contract
modifications before January 1st
2018
Contracts with customers
completed before the effective date
of January 1st 2018 do not create
adjustments to the financial
statements and will therefore not
have any effect for the Telefónica
Group
Telefónica Group will adopt the
cumulative transitional approach.
recognizing the cumulative effect of
the initial application of the Standard
as an adjustment in equity in 2018
Telefónica Group will not capitalize
incremental costs. that would create
an asset with an amortization period
of one year or less and recognize the
costs as expenses directly upon
incurrence
The Standard contains
certain practical
expedients for the
adoption of revenue
recognition
IFRS 15: Practical Expedients
This document and the Q&A session may contain forward-looking statements and information (hereinafter, the “Statements”) relating to
the Telefónica Group (hereinafter, the "Company" or "Telefónica") or otherwise. These Statements may include financial forecasts and
estimates based on assumptions or statements regarding plans, objectives and expectations that make reference to different matters, such
as the customer base and its evolution, growth of the different business lines and of the global business, market share, possible acquisitions,
divestitures or other transactions,Company’s results and other aspects related to the activity and situation of the Company.
The Statements can be identified, in certain cases, through the use of words such as “forecast”, "expectation", "anticipation", “aspiration”,
"purpose", "belief" or similar expressions or variations of such expressions. These Statements reflect the current views of Telefónica with
respect to future events, do not represent, by their own nature, any guarantee of future fulfilment, and are subject to risks and uncertainties
that could cause the final developments and results to materially differ from those expressed or implied by such Statements. These risks
and uncertainties include those identified in the documents containing more comprehensive information filed by Telefónica before the
different supervisory authorities of the securities markets in which its shares are listed and, in particular, the Spanish National Securities
Market Commission.
Except as required by applicable law, Telefónica does not assume any obligation to publicly update the Statements to adapt them to events
or circumstances taking place after the date hereof, including changes in the Company's business or business development strategy or any
other unexpected circumstance.
This document and the Q&A session may contain summarized, non-audited or non-GAAP financial information. The information contained
herein and therein should therefore be considered as a whole and in conjunction with all the public information regarding the Company
available, including any other documents released by the Company that may contain more detailed information.
In October 2015, the European Securities Markets Authority (ESMA) published guidelines on Alternative Performance Measures (APM),
applicable to regulated information published from July 3, 2016. Information related to APM used in this presentation are included in the our
consolidated financial statements and consolidated management report for the year 2017 submitted to the Spanish National Securities
Market Commission (CNMV), Note 2, page 283 of the .pdf filed. Recipients of this document are invited to read it.
Neither this document nor the Q&A session nor any of their contents constitute an offer to purchase, sale or exchange any securities, a
solicitation of any offer to purchase, sale or exchange of any securities, or a recommendation or advice regarding any security.
Disclaimer