MILAN: Shares in Telecom Italia (TIM) fell more than 2pc on Friday after Moody's downgraded the credit ratings of Italy's biggest phone group by one notch and said the outlook remained negative.

The price of TIM's bonds also fell at the open, pushing yields higher.

The yield on a bond maturing in May 2026 rose to 1.69pc from 1.60pc on Thursday, while a September 2025 bond yielded 1.60pc on Friday, up from 1.50pc the previous session.

"Moody's effectively highlighted the lights and shadows of TIM's equity story", Banca IMI analysts said.

"Despite CEO (Luigi Gubitosi's) efforts to organically and inorganically reduce the group's leverage, Moody's downgrade separates TIM from the investment grade level by two notches," it wrote in a note.

TIM's gross debt totalled 32.3 billion euros ($39.2 billion)as of Sept. 30.

Late on Thursday, Moody's cut TIM's long-term rating to 'Ba2' from 'Ba1', citing "a very competitive operating environment in Italy which will further constrain the company's ability to strengthen cash flow generation and reduce leverage."

Moody's flagged higher business and financial risks due to fresh investments in Brazil, the restored dividend policy and the increasing complexity of the group structure.

Broker Fidentiis said the move, albeit to be expected given the negative outlook on the rating since 2019 and the impact of the pandemic which hurt 2020 earnings, was negative for the stock because it could lead to higher debt costs.

Moody's expects TIM's adjusted net debt-to-core profit ratio to peak at 4.2 times in 2020 and to gradually start decreasing to reach 3.7 times by 2022.

At 0940 GMT, TIM shares were down 2.4pc, compared with a 0.8pc fall in Milan's blue chip index.