MOODY'S AFFIRMS TELEFONICA DE ARGENTINA'S DEBT RATINGS AT B1 WITH NEGATIVE OUTLOOK
London, December 11, 2000 -- Moody's Investors Service affirmed today the B1 senior unsecured debt ratings of Telefónica de Argentina SA (TASA), following the company's recently announced plan to reorganize.
TASA plans to spin off to other Telefónica S.A' affiliates, in one or more phases, all of its businesses other than its fixed-line local, long distance and international services, terminal equipment sales and, at least for the time being, Internet service provision. This is part of the global corporate restructuring plan being executed by Spain's Telefónica SA (Telefónica) (A2), which was announced earlier this year. The ratings of TASA are constrained by the sovereign ceiling rating in foreign currency of the Republic of Argentina. The rating outlook is negative in line with Moody's negative outlook on the country's sovereign ceiling rating.
The restructuring plan for TASA is part of a broader plan of Telefónica and includes the implementation of a new business model along global lines of business rather than by geographical business areas. Consequently, Telefónica expects to unlock the value potential of its global business lines, increase the strategic focus and financial flexibility by line of business, thus enhancing the group's competitive position both in Spain and in Latin America.
In addition, Telefónica's plan also comprised the equity-financed buy-out of the minority shareholder interests in TASA, Telefónica del Peru, Telesp and Tele Sudeste Celular. As a result of the shareholder buy-out, and after the expected completion of the transaction through which Telefónica will acquire 50% of Cointel (and thus become practically the sole owner of Cointel, the majority shareholder of TASA), Telefónica will own approximately 96% of TASA. This restructuring has been put in place by Telefónica to have greater control of the cash flow of the Latin American subsidiaries involved, and to fully benefit from global operating synergies as well as from better business management focus.
Although TASA's rating reflects the sovereign risk of a company operating and domiciled in Argentina, it has sustained strong operating and financial performance over the last several years, and as a result, enjoys strong credit fundamentals.
For example, the company has achieved a very efficient operating structure with an access line per employee ratio of about 427 and a fully digitalized circuit switched network. At the same time, access lines growth has consistently increased over the past few years at rates close to 10% annually. The ratio of debt to EBITDA remains below 2 and EBITDA coverage of interest expense is above a multiple of 6. Moody's expects the company to continue to benefit from its strong marketing and improving customer service, which will become increasingly important as the Argentine market has recently transitioned to being fully liberalised. Although the company will lose its current strong market share in the southern region as a result of competition, Moody's expects it to maintain a leading position in its service territory. Moody's also expects TASA to make inroads into the northern region, which has until recently been a monopoly in wireline public voice of Telecom Argentina (B1).
Although the spin-off of the wireless, data and other minor businesses to Telefónica's affiliates deprives the company from directly benefiting from the growth prospects of these high growth operations, Moody's notes that the restructuring has an almost neutral effect on TASA's current and near-term operating cash flow. This is due to the relatively small free cash flow contributions from these business segments compared to the wireline operations. In addition, due to the fact that wireless and data are still in a developmental stage, the elimination of their material capital spending requirements should enable the remaining wireline operations to generate significant free cash flow.
Moody's expects steadily increasing competition to have a moderate impact on the strong financial profile of TASA over the intermediate term. Expected further tariff reductions, combined with a weakened economy and market share loss, as a result of intensifying competition, are expected to result in a modest near-term decline in earnings and operating cash flow. Moody's expects the strong operating cash flow margins, currently over 50%, to decline slightly over time.
Wireline capital spending is likely to be slightly increased in the northern region, an area previously not served by the company. Nevertheless, Moody's expects TASA to continue to generate substantial operating cash flow after capital expenditures and dividends, which will be predominantly used to reduce debt. Consequently, at least over the next few years, debt protection ratios are expected to remain in a range generally associated with upper medium investment grade rated telecommunications companies.
The ratings affirmed are:
Telefónica de Argentina S.A.'s US$368,500,000 Notes due 2008, US$100,000,000 Notes due 2002, US$300,000,000 Notes due 2004 and US$400,000,000 FRN due in 2001.
Telefónica S.A. is the world's 11th largest telephone network operator, and the fifth largest in Europe. The company operates over 19 million exchange lines in Spain where it is the dominant provider of voice telephony and provides mobile communications, data transmission and Internet, yellow pages directories services, paging and telephone equipment for rent or purchase. Telefónica, directly or through its subsidiaries and affiliates, has significant investments in Latin America, including CTC in Chile, TASA in Argentina, CPT Telefónica del Peru, CANTV in Venezuela, TLD in Puerto Rico and in Brazil through CRT, Telesp and Tele Sudeste Celular. The company is headquartered in Madrid, Spain.
Telefónica de Argentina SA is domiciled in Buenos Aires, Republic of Argentina. It's the leading telecommunications company in Argentina. As of September 30, 2000, TASA had approximately 4.3 million lines in service, which equates to about 24 access lines per 100 inhabitants in the southern region of Argentina. TASA is one of the largest private sector companies in Argentina.
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