Credit Opinion: Koninklijke KPN .V.

Global Credit Research - 11 May 2015 ,

Ratings

Category Moody's Rating Outlook Stable Senior Unsecured -Dom Curr Baa3 Subordinate MTN -Dom Curr (P)Ba1 ST Issuer Rating -Dom Curr P-3

Contacts

Analyst Phone Ivan Palacios/Madrid 34.91.768.8200 Carlos Winzer/Madrid Michael J. Mulvaney/London 44.20.7772.5454

Key Indicators

[1]Koninklijke KPN N.V. 12/31/2014 12/31/2013 12/31/2012 12/31/2011 12/31/2010 Scale (USD Billion) $10.6 $11.2 $12.0 $18.1 $17.7 EBITDA Margin 35.2% 37.8% 40.7% 42.9% 44.1% Debt / EBITDA 3.5x 4.1x 4.6x 2.9x 2.7x FCF / Net Debt 2.4% 8.9% 5.6% 7.1% 7.7% RCF / Net Debt 19.4% 24.0% 19.4% 20.1% 20.1% (FFO + Interest Expense) / Interest Expense 3.7x 4.6x 5.6x 5.7x 5.2x (EBITDA - Capex) / Interest Expense 1.6x 1.3x 1.9x 3.4x 3.6x

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics

Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.

Opinion

Rating Drivers - Leading position in fixed and mobile in the Netherlands - Weak operating performance due to intense competition, adverse regulation and a slow macroeconomic environment, but there are initial signs that performance is bottoming out - Weak metrics for the rating category, although announced sale of BASE for EUR1.3 billion can improve ratios if most of the proceeds are used to reduce debt - Strong commitment to an investment grade rating proven by their sizeable capital increase, hybrid issuance in 2013 and use of proceeds from E-Plus disposal 2013 and use of proceeds from E-Plus disposal - Limited financial flexibility, other than via the monetisation of its 20.5% stake in Telefonica Deutschland - Solid liquidity profile Corporate Profile Koninklijke KPN N.V. (KPN) is the leading integrated provider of services in the Netherlands. The company also owns a 20.5% stake in Telefonica Deutschland. Its core business supplies wireline and wireless telephony, and TV to consumers, and end-to-end and ICT services to business customers. In addition, the company provides wholesale network services to third parties and operates an IP-based infrastructure with global scale in international wholesale through iBasis. In April 2015, KPN announced the sale of BASE Company (BASE), its mobile operator in to for a cash consideration of EUR 1,325 million, equivalent to 8.9x full-year 2014 EBITDA. Belgium contributed 9% of group revenues and 5% of EBITDA in 2014. In 2014, the group reported revenues of EUR8.1 billion and EBITDA of EUR3.0 billion (EUR2.6 billion as adjusted by KPN, excluding the release of pension provisions, restructuring charges and other exceptional items). America Movil S.A. de C.V. (A2 stable) owns a 21.4% stake in KPN. Rating Rationale KPN's Baa3 senior unsecured rating is supported principally by its leading position in the Dutch market, integrated business model, and solid liquidity profile. These considerations are balanced by KPN's (1) track record of weak operating performance, although there are initial signs that performance is bottoming out; (2) potential competitive pressures linked to the entry of Tele-2 in the Dutch mobile market, (3) its weak credit metrics for the rating category; and (4) limited financial flexibility, other than via the monetisation of its 20.5% stake in Telefonica Deutschland. The rating also factors in the potential for improved credit metrics if most of the proceeds from the sale of BASE are used to reduce debt. This leverage reduction would help to offset the loss of geographic diversity - resulting in a weakened business profile - owing to the sale of the Belgian asset. DETAILED RATING CONSIDERATIONS LEADING INTEGRATED POSITION IN THE DUTCH MARKET KPN has an integrated business model, with fixed and mobile operations. KPN's wireless service revenue (including Consumer and Business Mobile in the Netherlands and Mobile International) for the year ended December 2014 represented around 36% of total revenues. We note that KPN is the only integrated access provider in the Netherlands, as the cable operator does not own mobile infrastructure and there are two mobile- centric players ( and T-Mobile). KPN holds a leading position in its traditional domestic fixed-line market. In retail broadband the company reported a 40% revenue market share as of December 2014 and its residential TV business has grown solidly, to achieve a 27% market share. In addition, KPN remains the leader in the domestic wireless segment, with a 43% market share in terms of service revenues, ahead of T-Mobile and Vodafone. However, KPN's domestic market is relatively small, given the Netherlands' total population of 16.8 million, limiting its growth potential. OPERATING PERFORMANCE REMAINS WEAK BUT KPI's ARE TRENDING IN THE RIGHT DIRECTION KPN's operating performance remains weak. FY 2014 adjusted revenues dropped by 5% year-on-year, while adjusted EBITDA fell by 15% over the same period. The Business segment continues suffering structural changes that are unlikely to away anytime soon, such as the ongoing decline in market size and pricing pressures owing to corporate customers moving to new price schemes. In response to these challenges, the company will need to continue focusing on reducing its cost base to accommodate the expected lower revenue base. However, some key performance indicators are trending in the right direction. In fixed-line, KPN's domestic business is showing some signs of stability in terms of its revenues and market share, which are primarily driven by IPTV growth, helped by its hybrid copper/fiber strategy. The company has achieved 98% population coverage in and 75% of its sites are fiber connected. In addition, it can offer 100Mbps to more than half of the Dutch population and expects to reach 85% by 2016. These investments in quality networks should translate over time into pricing power and revenue growth. KPN is at the end of the capex upgrade cycle, and therefore, the management team expects to reduce capex levels going forward to below EUR1.3 billion (after the sale of BASE). The company expects EBITDA to stabilise by the end of 2015. While revenues will continue to be under pressure, the company expects to mitigate these pressures on profitability by achieving efficiency gains. Its simplification programme, which includes 2,000-2,500 FTE reductions by 2016, targets annual run-rate capex and opex savings of more than EUR 400 million by 2016. DUTCH MARKET REMAINS VERY COMPETITIVE The Netherlands is one of the most competitive markets in Europe for telecom operators. In fixed line, KPN is facing a stronger cable competitor following the acquisition of by UPC. KPN is trying to defend its market position by increasing its triple and quad play share, while at the same time deploying fiber to the home (FTTH) and fibre to the cabinet (FTTC), as well as using several technologies (such as vectoring) to optimize its legacy copper network. We expect the combined Ziggo/UPC to be disciplined, as it goes through its own integration process, while the relatively high leverage of the combined entity will make it focus on cash generation. While we expect competition to be focused on product and service quality, disruptive price competition remains a possibility. KPN's competitive environment in mobile is also challenging with strong competition in price and new entrants in the no frills segment. KPN will shortly face the impending roll-out of a rival 4G mobile internet service by low cost provider , although full commercial launch is not expected until Q1 2016. Note that the Dutch market is the only one in that will see the number of players increase from 3 to 4 in the near term. While KPN has accelerated its investments in 4G to regain its historical competitive advantage ahead of Tele2's mobile launch, we expect to see further price competition in the market. In fact, KPN has recently increased the amount of data included in some of its mobile internet packages without raising prices. WEAK CREDIT METRICS FOR THE RATING CATEGORY KPN ended 2014 with a Net debt/EBITDA ratio (as adjusted by Moody's) of 3.5x, exceeding the ratio guidance for the Baa3 rating category (adjusted net debt/EBITDA between 2.5x and 3.2x). The company reported a Retained Cash Flow (RCF)/net debt ratio (as adjusted by Moody's) of 19.4%, also slightly below the ratio guidance for the rating category (between 20% and 25%). With EBITDA, as adjusted by Moody's, expected to stabilise by the end of 2015, supported by Reggefiber's contribution and the dividend from Telefonica Deutschland, and a fairly small cash flow generation, we expect leverage to remain broadly unchanged in 2015. Going forward, with lower cash taxes, lower interest payments and capex coming down to below EUR1.3 billion because of the completion of its 4G network, we expect free cash flow to grow over time, while leverage should progressively come down, although at a slow pace. SALE OF BASE WILL BE CREDIT POSITIVE IF MOST OF THE PROCEEDS ARE USED FOR DEBT REDUCTION In April 2015, KPN announced the sale of BASE, the third largest mobile operator in Belgium to Telenet for a cash consideration of EUR 1,325 million. The sale of BASE is subject to merger clearance, and KPN will get a break-up fee of EUR 100 million if the merger control authorities do not approve the transaction. KPN said it plans to announce the use of proceeds on completion of the transaction. The credit impact of this sale will largely depend on the final use of proceeds. If KPN uses most of the proceeds from the transaction for debt reduction, we estimate that leverage (Moody's adjusted net debt/EBITDA) will improve by around 0.4x, to 3.1x pro forma for this deal, compared with 3.5x as of year-end December 2014. This leverage reduction would help to offset the loss of geographical diversity that would otherwise weaken the company's business profile. Following this sale, KPN will be concentrated on the Netherlands, with its only material source of international cash flows the dividend stream from Telefonica Deutschland. However, if all of the proceeds are used for shareholder remuneration and KPN does not reduce leverage organically or inorganically, by using proceeds from a potential sale of its 20.5% stake in Telefonica Deutschland, KPN's credit metrics will be weak for the Baa3 rating for a sustained period of time, which could accentuate downward pressure on the rating. The sale of BASE presents a strategic solution for an asset which was facing greater operating risk as the operator did not own fixed broadband assets in a market that is becoming increasingly convergent. In addition, BASE's recent operating performance has been very weak, due to the increasingly competitive environment in Belgium following Telenet's launch of its MVNO offering. As a result, BASE's EBITDA dropped by around 45% in 2014 from the EUR272 million reported in 2012. BASE was also cash flow negative (defined as EBITDA minus capex) in 2014, due to pressures on margins and high capex due to the roll out of its 4G network. In light of the recent performance and strategic challenges of BASE, we believe that KPN has achieved a more than fair valuation for this asset. In addition, there could be additional upside for KPN as it retains a majority interest in any net proceeds of the claim against Belgacom for abuse of its dominant position, which BASE will continue to pursue. STAKE IN TELEFONICA DEUTSCHLAND AND STRONG COMMITMENT TO AN INVESTMENT GRADE RATING MITIGATE WEAK CREDIT METRICS KPN's management has made a substantial effort in recent years to protect the company's financial profile. In 2013, KPN completed a EUR3 billion rights issue, the issuance of hybrid instruments providing EUR1 billion of equity credit and in 2014, it sold E-Plus for a total consideration of EUR8.55 billion. Despite all these measures, the metrics remain weak for the Baa3 rating category. However, the rating recognises the flexibility provided by KPN's 20.5% stake in Telefonica Deutschland (EUR3.4 billion value as of May 2015). This stake will provide KPN with additional financial flexibility in the event that it decided to sell this stake in the future. KPN has clearly stated that proceeds from a potential sale of this stake would be used to (1) maintain a solid credit profile, (2) provide flexibility for strategic investments and/or small in- country M&A, and (3) increase shareholder remuneration. Nevertheless, we note that KPN has recently decided to pass through the dividend from Telefonica Deutschland to be received in 2015 (around EUR150 million) to shareholders. While current metrics are weak for the rating category, we expect the company to remain committed to its investment grade rating and use a material amount of proceeds from disposals to reduce debt, such that its credit metrics become more adequately positioned for the Baa3 rating. Liquidity Profile KPN has a very solid liquidity profile. As of March 2015, KPN group had around EUR2.3 billion in cash and short- term investments, and full availability under its EUR2.0 billion syndicated credit facility due in 2018, which is not subject to MAC clauses or financial covenants. The cash balance plus the credit facility are enough to cover bond maturities in 2015 (EUR1.0 billion), 2016 (EUR0.8 billion) and 2017 (EUR0.8 billion). We would expect the company to opportunistically review options to accelerate the reduction in gross debt by using its excess cash on balance sheet, such as the repayment of the EUR1 billion bond maturity in 2015. Rating Outlook The stable rating outlook reflects our expectation that continuing management initiatives will, to a large extent, balance the tough market in which the company will have to continue to weather competitive, macroeconomic, and regulatory pressures. The outlook also factors in our expectation that KPN's management will preserve the company's financial profile within the ratio guidance for a Baa3 rating, by using a material amount of proceeds from disposals for debt reduction. What Could Change the Rating - Up We would consider a rating upgrade if KPN's debt protection ratios were to strengthen significantly as a result of improvements in its operational cash flows and a reduction in debt. The rating could come under positive pressure if the company achieved sustainable improvements in its debt protection ratios, such as adjusted RCF/net debt of at least 25% and adjusted net debt/EBITDA comfortably below 2.5x, while experiencing a significant improvement in the business environment. What Could Change the Rating - Down Credit metrics that would lead to downward pressure on the rating include RCF/net adjusted debt falling to below 20% or adjusted net debt/EBITDA exceeding 3.2x on an ongoing basis. While KPN's ratios are currently outside of these ranges, we tolerate a temporary deviation from these levels in light of the large value of KPN's stake in Telefonica Deutschland and the company's commitment and track record in defending its investment-grade rating. Failure to reduce leverage organically or an aggressive use of proceeds from disposals, with a large distribution of these proceeds to shareholders, would lead to downward rating pressure.

Rating Factors

Koninklijke KPN N.V.

Global Telecommunications Industry Grid [1][2] Current FY [3]Moody's 12-18 Month 12/31/2014 Forward ViewAs of 5/6/2015 Factor 1: Scale And Business Model, Competitive Measure Score Measure Score Environment And Technical Positioning (27% ) a) Scale (USD Billion) $10.6 A $9.7 Baa b) Business Model, Competitive Environment and Baa Baa Baa Baa Technical Positioning Factor 2: Operation Environment (16%) a) Regulatory and Political Baa Baa Baa Baa b) Market Share A A A A Factor 3: Financial Policy (5%) a) Financial Policy Baa Baa Baa Baa Factor 4:Operating Performance (5%) a) EBITDA Margin 35.2% Baa 36% - 38% Baa Factor 5: Financial Strength (47%) a) Net Debt / EBITDA 3.5x Ba 3.1x - 3.4x Ba b) FCF / Net Debt 2.4% Caa 3% - 3.2% Caa c) RCF / Net Debt 19.4% B 17% - 18% B d) (FFO + Interest Expense) / Interest Expense 3.7x Ba 5x - 5.2x Baa e) (EBITDA - Capex) / Interest Expense 1.6x B 2.8x - 2.9x Ba Rating: a) Indicated Rating from Grid Ba1 Ba1 b) Actual Rating Assigned Baa3

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 12/31/2014; Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating action information and rating history.

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