CORPORATES CREDIT OPINION Deutsche Telekom AG 21 June 2021 Update following outlook change to stable Update Summary Deutsche Telekom AG's (Deutsche Telekom) Baa1 rating primarily reflects the company's large size and scale; its geographical diversification in Germany, the US, and Central and Eastern Europe; its strong market positions across its geographical footprint, despite the potential for increased competition; its high capital spending requirements, given the low fibre coverage in RATINGS Germany; and the marginal impact of the coronavirus pandemic on the company's operating Deutsche Telekom AG performance. Domicile Bonn, Germany Long Term Rating Baa1 Deutsche Telekom’s rating also factors in management’s financial policy that includes a Type Senior Unsecured - Fgn leverage comfort zone of net debt/EBITDA (as reported by the company) between 2.25x and Curr 2.75x (equivalent to Moody’s-adjusted net leverage of around 3.0x); its continued commitment Outlook Stable towards the net leverage corridor and deleveraging after the consolidation of T-Mobile USA, Please see the ratings section at the end of this report Inc. (T-Mobile USA, Ba2 stable); the strong evolution of the company's US subsidiary, the for more information. The ratings and outlook shown group's key growth engine; and its excellent liquidity management, with a minimum two-year reflect information as of the publication date. pre-funding policy. Given Deutsche Telekom's status as a government-related issuer (GRI), the Baa1 rating benefits Contacts from a one-notch uplift stemming from our expectation of support from the Government of Carlos Winzer +34.91.768.8238 Germany (Aaa stable). Senior Vice President [email protected] Exhibit 1 We expect Deutsche Telekom's RCF / Net debt to stay above 20% in 2021-22 Pilar Anduiza +34.91.768.8220 Evolution of Deutsche Telekom's adjusted RCF / Net debt Associate Analyst RCF/Net debt Downward pressure Upward pressure [email protected] 31.0% Ivan Palacios +34.91.768.8229 29.0% Associate Managing Director 27.0% [email protected] 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% 2016 2017 2018 2019 2020 2021e 2022e Source: Moody’s Financial Metrics™ and Moody's Investors Service estimates MOODY'S INVESTORS SERVICE CORPORATES Credit strengths » Large size and scale, and broad geographical diversification » A strong market position in Germany, which is a very competitive market » Excellent liquidity management, with a minimum two-year pre-funding policy » A convergent strategy in a number of European countries » Strong performance of T-Mobile USA Credit challenges » Net leverage will likely remain above the guidance for the current rating for at least two years. » The merger between T-Mobile USA and Sprint entails execution risks and an increasing exposure to a high-yield asset. » Capital spending requirements to address the increasing demand for faster speeds in fixed-line and mobile networks remain high. » The pandemic has hurt the company's operating performance, although to a more limited extent than the companies in other sectors. » The operating environment for T-Systems remains difficult and has been the most severely hurt by the coronavirus pandemic. Rating outlook The stable rating outlook reflects our view that Deutsche Telekom's rating is well positioned in the Baa1 rating category because we expect gradual deleveraging towards management’s comfort zone leverage of 2.25x-2.75x by 2024 (equivalent to Moody’s-adjusted leverage below 3x), combined with improving underlying operating performance at the group level. Factors that could lead to an upgrade We would consider upgrading Deutsche Telekom's rating to A3 if the group strengthens its credit metrics on a sustained basis, such that: » its retained cash flow/adjusted net debt exceeds 25% and adjusted total net debt/EBITDA remains below 2.5x, both on a sustained basis, with an improvement in the business profile and operating conditions Factors that could lead to a downgrade A rating downgrade could result if the company were to experience a deterioration in its operating performance, or embark on an aggressive expansion or acquisition programme, leading to higher financial, business and execution risks, such that its: » adjusted net debt/EBITDA were to exceed 3.0x, with no expectation of an improvement over a 24-month period » adjusted retained cash flow/net debt were to decline to 18% or less on a sustained basis The rating could also be downgraded if there is: » a reduction in the government's equity stake to less than 20%, because then we may no longer apply the Government-Related Issuers rating methodology to Deutsche Telekom. 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 www.moodys.com for the most updated credit rating action information and rating history. 2 21 June 2021 Deutsche Telekom AG: Update following outlook change to stable MOODY'S INVESTORS SERVICE CORPORATES Key indicators Exhibit 2 Deutsche Telekom AG [1][2][3] Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 2021e 2022e EUR Millions Revenue 69,228 73,095 74,947 75,656 80,531 100,999 105,423 106,164 Debt / EBITDA 4.0x 3.5x 3.0x 3.3x 3.4x 3.9x 4.1x 3.9x Net Debt / EBITDA 3.6x 3.2x 2.9x 3.2x 3.2x 3.5x 3.8x 3.6x RCF / Debt 20.2% 22.8% 27.3% 26.3% 22.9% 18.9% 18.9% 19.8% RCF / Net Debt 22.8% 25.1% 28.5% 27.5% 24.3% 20.8% 20.6% 21.6% (EBITDA-CAPEX) / Interest Expense 2.2x 2.7x 3.0x 3.1x 3.3x 3.0x 2.9x 3.1x [1] All figures and ratios are calculated using Moody's estimates and standard adjustments. [2] Periods are financial year-end unless indicated. LTM = Last 12 months. [3] Moody's Forecasts (f) or Projections (proj.) are Moody's opinion and do not represent the views of the issuer. Source: Moody's Investors Service Profile Deutsche Telekom AG (Deutsche Telekom), domiciled in Bonn, Germany, is a leading provider of wireline and wireless services in the country. The key countries for the group are Germany (22.8% of net revenue in 2020) and the US (60.6%), where it operates in the mobile segment through T-Mobile USA. Deutsche Telekom also retains strong market positions in both the fixed and mobile segments in Greece, through OTE, and in a number of Central and Eastern European countries. In 2020, the company generated €101 billion in revenue and €40.4 billion in EBITDA (adjusted for special factors). Deutsche Telekom is 31.9% owned by the German government (14.5% directly and 17.4% through Germany's state-owned development bank Kreditanstalt für Wiederaufbau [KFW, Aaa stable]). Exhibit 3 T-Mobile USA's weight in the group is substantial (61% of net revenue and 62% of EBITDA) Net revenue and EBITDA by business unit as of 2020 [1][2][3] Net Revenue EBITDA 70.0% 60.6% 62.2% 60.0% 50.0% 40.0% 30.0% 22.8% 23.0% 20.0% 11.0% 10.7% 10.0% 3.2% 3.2% 0.9% 2.4% 0.0% Germany United States Europe Systems Solutions Others [1] Others include group development, group headquarters and group services units. [2] Reported EBITDA adjusted for special factors. [3] Reconciliation excluded from EBITDA calculations. Source: Company 3 21 June 2021 Deutsche Telekom AG: Update following outlook change to stable MOODY'S INVESTORS SERVICE CORPORATES Recent developments On 15 June 2021, we changed Deutsche Telekom's outlook to stable from negative. The change in outlook to stable from negative reflects our expectation of progressive improvement in DT’s operating performance in its core markets of Germany and the US, combined with management’s commitment to progressively reduce leverage to around 3.0x by 2024 from 3.8x in 2021. The stable outlook factors in the solid operating performance, our expectation of improved cash flow generation and significant value creation of T-Mobile USA, which DT consolidates and controls with a 43% equity stake, but with an option to increase it to above 50%. We factor into the assessment of DT its exposure to a Ba2-rated asset in the US, despite the publicly stated limited recourse and self-funding strategy of TMUS. Detailed credit considerations T-Mobile USA's performance and synergy execution ahead of expectations but leverage will remain high over the next two years The merger between T-Mobile USA and Sprint closed on 1 April 2020. Following the completion of the transaction, Deutsche Telekom holds around 43% of the shares in T-Mobile USA. However, under a proxy agreement reached with SoftBank Group Corp. (Softbank, Ba3 stable), Deutsche Telekom controls majority of voting rights in the new T-Mobile USA. In June 2020, Softbank sold 198 million shares in the company in the open market and gave Deutsche Telekom the option to purchase another 101 million shares (around 8% of the company's share capital) until June 2024. While DT’s leverage, on a Moody’s-adjusted net debt/EBITDA basis, is expected to reach 3.8x this year, exceeding the 3.0x threshold for the Baa1 rating category, the rating affirmation with a stable outlook factors in our expectation that the company will continue to progressively reduce leverage towards 3.0x by 2024, in line with management’s comfort zone. Exhibit 4 We expect Deutsche Telekom's net leverage to stay at around 3.8x-3.6x in 2021-22 Evolution of Deutsche Telekom's adjusted Net Debt / EBITDA Downward pressure Upward pressure Net debt/EBITDA 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x 2016 2017 2018 2019 2020 2021e 2022e Source: Moody’s Financial Metrics™ and Moody's Investors Service estimates We also acknowledge the sound strategic logic behind the merger and the expected synergy benefits, as well as the associated execution risks and the increasing exposure to a Ba2-rated asset.