By Manuela Mesco

MILAN--Telecom Italia's (TIT.MI) Chief Executive Franco Bernabe Wednesday said the company could avoid a potential credit rating downgrade by selling Latin American assets or by launching a capital increase.

Telecom Italia, under watch from the main credit rating agencies because of its huge 29 euro billion ($39.1 billion) debt, has two options to avoid a downgrade, the CEO said. "The first is to dispose - through a competitive process -- all the assets in Latin America. Another, is a capital increase open to current or new stakeholders," he said. Market conditions are right for a capital increase, he added.

Mr. Bernabe was speaking at a parliamentary committee hearing a day after Spanish Telefonica (TEF) said it took control of Telco, the holding company that owns the largest single stake in Telecom Italia. At the hearing, Mr. Bernabe repeatedly said that he learned about changes in the Telco shareholding structure only after they were made.

The CEO is due to bring proposals on the company's future strategies at a board meeting scheduled for Oct.3. "The management job is to propose, the board will deliberate," he said on Wednesday. Yet he added that if Telco's board members want to block a proposal, they have the power to do so.

Telecom Italia and Telefonica both have units in Latin America. With Telefonica taking control of Telco, the antitrust regulator could require the Spanish company to give up either its or Telecom Italia's Latin American assets.

"[A credit rating downgrade] will happen, but nobody is really concerned about it, as the sale of TIM Brazil will resolve the balance sheet's issues," said Sanford C. Bernstein analyst Robin Bienenstock on Tuesday.

A downgrade to junk status from Moody's could potentially arrive later this year, although the credit rating agency said on Tuesday that it sees no direct credit implications from Telefonica's increased stake in Telco for either Telefonica's or Telecom Italia's rating.

Moody's senior vice president Carlos Winzer said the agency is still in the process of reviewing the Italian company's rating and will closely look at the board's decisions next week. Yet, these could still not be enough for completing the rating review, he added.

Write to Manuela Mesco at manuela.mesco@wsj.com

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