Primary Credit Analyst: Xavier Buffon, Paris (33) ; Standard & Poor's Base-Case Scenario

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1 Primary Credit Analyst: Xavier Buffon, Paris (33) ; Secondary Contact: Matthias J Raab, CFA, Frankfurt (49) ; matthias.raab@standardandpoors.com Table Of Contents Rationale Outlook Standard & Poor's Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Government Influence Ratings Score Snapshot Reconciliation Related Criteria And Research MAY 11, Standard & Poor's. All rights reserved. No reprint or dissemination without Standard & Poor s permission. See Terms of Use/Disclaimer on the last page

2 Business Risk: STRONG Vulnerable Excellent a- a- a CORPORATE CREDIT RATING Financial Risk: INTERMEDIATE A/Stable/-- Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Strong Very solid domestic position in domestic fixed-line and mobile telecommunications. High margins and robust free operating cash flow generation. Wealthy quality-conscious domestic service area. Maturity of the industry, voice services commoditization, and technological changes. Weaker, albeit strengthening, market position and operating performance of Italian subsidiary Fastweb. Heavy capital expenditures (capex) to sustain, expand, and upgrade the high-quality network. Financial Risk: Intermediate Conservative financial policy. Our expectation of a "moderate" likelihood of extraordinary support, if needed, from the Swiss government. A somewhat inflexible shareholder distribution policy, in our view. MAY 11,

3 Outlook: Stable The stable outlook on Swiss telecommunications operator Swisscom AG reflects Standard & Poor's Ratings Services' view that the company will continue to successfully defend its core domestic market positions and further migrate its customers toward its new offerings without significant disruption to revenues and EBITDA. The stable outlook also factors in our expectation that the group's Standard & Poor's adjusted debt-to-ebitda ratio will stay at about 2.5x and its adjusted ratio of funds from operations (FFO) to debt will be approximately 35% over In addition, we believe that the Swiss government will retain its majority ownership of Swisscom over the next few years. Downside scenario Although it is unlikely at this stage, we could consider revising the outlook to negative if Swisscom didn't offset pricing pressures and commoditization by increasing bundles and Internet Protocol television(iptv) penetration and monetizing its high-end offers and superior network. Specifically, if operating conditions deteriorated to the extent that EBITDA dropped by high single digits, we would expect weakening in Swisscom's credit metrics. Restoring stronger metrics could be difficult, in our opinion. Upside scenario We could raise our rating on Swisscom if its Standard & Poor's-adjusted debt-to-ebitda ratio improved to below 2x on a sustainable basis. This strengthening would require the group to uphold revenue and EBITDA growth and maintain a very conservative financial policy. Standard & Poor's Base-Case Scenario MAY 11,

4 Assumptions In our base-case scenario, we expect Swisscom will continue to monetize its high-end offers. As a result, we forecast that EBITDA will continue to grow organically, albeit declining slightly on a reported basis in 2015 after the Swiss franc's sharp appreciation against euro and its impact on translation of subsidiary Fastweb's EBITDA into Swiss francs. Slightly decreasing revenues in 2015 due to the Swiss franc's appreciation versus the euro, followed by slight positive growth in , with growing flat-fee bundles and increasing IPTV penetration largely mitigating lower revenues from usage-based and single-play products and some pricing pressures in the corporate segment. Moderately declining EBITDA in 2015 on negative currency effects, with positive growth resuming from High capital expenditure to sales of about 20% over , caused by 4G and fiber rollouts. Leverage that will reduce slightly by 2017 as EBITDA improves and Swisscom dedicates discretionary cash flows to reduce debt. Key Metrics 2014a 2015e 2016e Revenue growth (%) 2.4 (2)-(3) 0-1 EBITDA margin (%) Debt-to-EBITDA ratio (x)* FFO-to-debt ratio (%)* All data is Standard & Poor's adjusted. FFO--Funds from operations. A--Actual. E Estimate. Company Description Swisscom is Switzerland's leading telecoms provider. It offers a wide range of products and services for mobile, landline, and Internet Protocol-based voice and data communication and TV services. Swisscom owns 100% of Fastweb, the third-largest fixed-line operator in Italy. The Italian subsidiary offers fixed-line broadband, voice, and TV services for residential and corporate customers. In addition, it acts as a mobile virtual network operator (MVNO). The Swiss government's stake in Swisscom was 51% as of Dec. 31, Business Risk: Strong We assess Swisscom's business risk profile as strong, reflecting its established and strong domestic positions in wireline and wireless communications across its corporate and residential customer segments. In addition, the group has substantially stronger shares than its local domestic competitors, and has rapidly increased its market share in digital pay-tv services in the past few years through its IPTV offering. We think the group will maintain its strong leading positions in the future, thanks to its ongoing heavy investment in fiber-to-the-home (FTTH) and 4G networks. MAY 11,

5 These market positions, together with the group's scale and strategic focus on network quality, should help to maintain fairly high margins in the future. We think tswisscom's regulatory environment will also remain relatively benign compared with its European peers'. Furthermore, any introduction of up-front regulation--in cases where the regulator believes a telecoms operator has a dominant market position--would require a change of the current law on telecommunications, and the legislative process could take more than two years. In Italy, Swisscom's subsidiary Fastweb has an extensive fiber network, which is a key competitive strength as there is no competition from cable operators in Italy. That said, it faces tough economic conditions, fierce price competition, and currency risks given the translation of Fastweb's EBITDA contribution to Swiss francs from euros. As in other European countries, the industry is affected by the rapid commoditization of voice services and technological and behavioral changes that are causing secular decline in metered services and the replacement of traditional services by IP-based applications. Swisscom reshuffled its product line-up in 2012 to include flat-fee bundles and tiered pricing as the company seeks to monetize new-generation, faster networks such as mobile 4G. Swisscom has so far been successful in implementing this strategy, thanks to its supportive and wealthy service area, the absence of a disruptive competitor, its dominant positions, and a very high-quality network. S&P Base-Case Operating Scenario Growing flat-fee bundles, further increasing IPTV penetration and customers trading up to more expensive contracts offsetting lower revenues from usage-based and single-play products and some pricing pressures in the corporate segment. Increased organic in 2016, backed by cost savings and the traction provided by bundles, IPTV, and tiered pricing. Peer comparison Swisscom has a more supportive service area than its peers, and a stronger position with regard to domestic competitors than other former telecom incumbents have in their respective countries, as well as a more benign regulatory environment, which allows the company to better monetize its high-quality network. Table 1 Swisscom AG Peer Comparison Industry Sector: Diversified Telecom Swisscom AG TeliaSonera AB Telenor ASA Rating as of May 11, 2015 A/Stable/-- A-/Stable/A-2 A/Stable/A-1 (Mil. CHF) --Average of past three fiscal years-- Revenues 11, , ,799.4 EBITDA 4, , ,774.3 Funds from operations (FFO) 3, , ,628.0 Net income from continuing operations 1, , ,353.1 Cash flow from operations 3, , ,827.4 Capital expenditures 2, , , MAY 11,

6 Table 1 Swisscom AG Peer Comparison (cont.) Free operating cash flow 1, , ,448.9 Discretionary cash flow Cash and short-term investments Debt 10, , ,184.7 Equity 5, , ,516.4 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash interest coverage (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) CHF--Swiss franc. Financial Risk: Intermediate Our assessment of Swisscom's financial risk profile as intermediate reflects our expectation that that the group's leverage will stay at about 2.5x despite heavy capital expenditure and only modest discretionary cash flows. S&P Base-Case Cash Flow And Capital Structure Scenario We anticipate consistently hefty capital spending given the roll out of domestic 4G and fiber networks, and the footprint extension at Fastweb. Free cash flow of about Swiss franc (CHF) 1.5 billion annually in Modest discretionary cash flows after a stable CHF1.1 billion in dividends, dedicated to reducing gross financial debt. Financial Summary Table 2 Swisscom AG Financial Summary Industry Sector: Diversified Telecom --Fiscal year ended Dec (Mil. CHF) Revenues 11, , , , ,988.0 EBITDA 4, , , , ,952.5 Funds from operations (FFO) 3, , , , ,081.8 Net income from continuing operations 1, , , , MAY 11,

7 Table 2 Swisscom AG Financial Summary (cont.) Cash flow from operations 3, , , , ,166.8 Capital expenditures 2, , , , ,903.0 Free operating cash flow 1, , , , ,263.8 Discretionary cash flow ,219.8 Debt 11, , , , ,820.9 Equity 5, , , , ,494.1 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash interest coverage (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) CHF--Swiss franc. Liquidity: Strong We assess Swisscom's liquidity as "strong" under our criteria. We anticipate that liquidity sources will exceed funding needs by more than 1.6x in the 12 months started Dec. 31, In addition, we think management will maintain a strong track record of proactive refinancing. Principal Liquidity Sources As of Dec. 31, 2014: FFO of about CHF3.8 billion. CHF2.1 billion from an undrawn committed facility maturing in Approximately CHF800 million in surplus cash and short-term investments. Principal Liquidity Uses About CHF2.3 billion in capital expenditure. Annual cash dividends of CHF1.1 billion. Approximately CHF1.5 billion in debt maturities. Debt maturities Table 3 Swisscom AG Debt Maturities Billion CHF MAY 11,

8 Table 3 Swisscom AG Debt Maturities (cont.) Thereafter 4.8 CHF--Swiss franc. Covenant Analysis Change-of-control clauses exist in the group's bank loans, bonds, and private placements. The bank loans would be due for immediate repayment if Switzerland's stake in Swisscom were to fall below 35%, or if another shareholder were to take control of the group. Bondholders would be entitled to sell the bonds if another shareholder gained a majority share in Swisscom and at the same time the long-term corporate credit rating on the group fell below 'BBB-'. Government Influence We consider Swisscom to be a government-related entity (GRE) under our criteria. In accordance with our criteria for rating GREs, our view of a "moderate" likelihood of timely and sufficient extraordinary government support is based on our assessment of Swisscom's: "Strong" link with the Swiss government, primarily because the latter defines Swisscom's strategic goals and is unlikely, in our view, to reduce its majority ownership stake in the next few years; and "Limited" role, as the Swiss government is primarily interested in the stability of Swisscom's operations and not so much in its credit standing. Ratings Score Snapshot Corporate Credit Rating A/Stable/-- Business risk: Strong Country risk: Low Industry risk: Intermediate Competitive position: Strong Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: a- Modifiers Diversification/Portfolio effect: Neutral (no impact) MAY 11,

9 Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Strong (no impact) Management and governance: Strong (no impact) Comparable rating analysis: Neutral (no impact) Stand-alone credit profile : a- Related government rating: AAA Likelihood of government support: Moderate (+1 notch from SACP) Reconciliation Table 4 Reconciliation Of Swisscom AG Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. CHF) Swisscom AG reported amounts --Fiscal year ended Dec. 31, Debt EBITDA Cash flow from operations Reported 8, , ,770.0 Standard & Poor's adjustments Interest expense (reported) -- (216.0) -- Interest income (reported) Current tax expense (reported) -- (378.0) -- Operating leases Postretirement benefit obligations/deferred compensation 1,932.0 (20.4) 1.6 Surplus cash (171.0) Capitalized interest -- (12.0) (12.0) Share-based compensation expense Dividends received from equity investments Asset retirement obligations Reclassification of interest and dividend cash flows (205.0) Non-controlling Interest/Minority interest Debt - Other (142.0) Total adjustments 2,808.9 (496.4) (130.4) Standard & Poor's adjusted amounts Debt Funds from operations Cash flow from operations Adjusted 11, , ,639.6 CHF--Swiss franc. MAY 11,

10 Related Criteria And Research Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Key Credit Factors For The Telecommunications And Cable Industry, Dec. 12, 2013 Corporate Methodology, Nov. 19, 2013 Business And Financial Risk Matrix Business Risk Profile Financial Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Ratings Detail (As Of May 11, 2015) Swisscom AG Corporate Credit Rating Senior Unsecured Corporate Credit Ratings History 30-Jun Mar-2007 A/Stable/-- A A/Stable/-- A-/Stable/-- *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com MAY 11,

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