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Rating Action:

MOODY'S AFFIRMS TELEFONICA´S A3 LONG-TERM SENIOR UNSECURED AND PRIME-2 SHORT-TERM RATINGS

08 Mar 2004
MOODY'S AFFIRMS TELEFONICA´S A3 LONG-TERM SENIOR UNSECURED AND PRIME-2 SHORT-TERM RATINGS

Madrid, March 08, 2004 -- Moody's Investors Service today affirmed the A3 senior unsecured long-term debt ratings and Prime-2 short-term ratings for Telefónica S.A (Telefónica) and its fully guaranteed subsidiaries. The rating affirmations follow the announcement made today that Telefónica and Bell South (BS) have reached a stock purchase agreement by which Telefónica will buy, with a cash payment, all of BS´s equity investments in Latam wireless subsidiaries. The enterprise value of the subsidiaries being acquired is $ 5.8 billion, which includes the assumed debt. The acquisition is subject to regulatory and government approval in each one of the countries and is expected to be completed in 2004.

The rating outlook remains stable and factors Moody´s expectation that Telefónica´s management will minimize any further investments in the short term and will continue to strengthen the group's operating cash flow to preserve a minimum retained cash flow to net adjusted debt of 30% and a minimum interest coverage of 4x.

According to Moody's, the A3 and Prime-2 ratings reflect the prospective balance between Telefónica's financial and business risks in light of the increased exposure to Latam resulting from this acquisition. Moody´s expects that Telefónica's free cash flow will continue to strengthen, thus offseting the relatively high investment announced today. In addition, Moody´s has also factored that the acquisition further strengthens Telefónica´s scale and scope of its wireless operations in Latam and favourably positions it to take advantage of significant growth potential. Management has stated that integration costs will amount to some $200 million and the opex and capex synergies could be about $1 billion.

Moody's notes that Telefónica will continue to be significantly exposed to Latin America, where approximately 33% of the future free cash flow is expected to be generated. The rating agency anticipates that, in the near to medium term, management will pursue a conservative financial strategy through the use of internal free funds, and finance Latin American operations with liabilities in local currency. Even though the exposure to Latin American volatility risk will continue to be partially offset by hedging mechanisms as well as management's track record, Moody´s believes that this risk is commensurate with an A3 and Prime-2 ratings -- especially when compared to the expected free cash flow and gross group debt.

Moody's expects free cash flow to continue to underpin management's determination to continue to improve debt protection ratios. Control over costs, stable capex and expected further operating efficiency gains will contribute to free cash flow strengthening.

Moody's believes that Telefónica's liquidity risk is satisfactory. The company is able to finance its debt maturities of Euro 5.6 billion in 2004 from existing cash and liquid investments of some Euro 3.5 billion as of December 2003, operating cash flow, committed and available bank facilities and relatively predictable sources without the need to access the capital markets.

We believe Telefónica has a strong management team with a consistent strategy, which includes (1) the global organization of the group along business lines; (2) the maintenance of leadership in all core areas in the Spanish market; (3) the consolidation of its leading position in Latin America; and (4) the intention to further strengthen the capital structure together with management's commitment to maintaining strong debt protection ratios.

Headquartered in Madrid, Spain, Telefónica S.A. is the second largest European telecommunications company by market capitalisation. The company operates over 21 million exchange lines in Spain where it is the leading provider of telecommunications, including wireline and wireless voice, data transmission and Internet, yellow pages directories services, paging and telephone equipment for rent or purchase. Telefónica has significant investments in Latin America, including CTC in Chile, TASA in Argentina, CPT Telefónica del Peru, CANTV in Venezuela, TLD in Puerto Rico, Pegaso in Mexico and in Brazil through CRT, Telesp and Tele Sudeste Celular.

Madrid
Carlos Winzer
Senior Vice President
Senior Vice President
Moody's Investors Service Espana, S.A.
JOURNALISTS: 33 1 53 43 93 78 SUBSCRIBERS: 44 20 7772 5454

London
Stuart Lawton
Managing Director
Managing Director
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

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