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Rating Action:

MOODY'S AMERICA LATINA ASSIGNS Aa1.br RATING TO TELESP DEBENTURE PROGRAM

 The document has been translated in other languages

17 Sep 2004
MOODY'S AMERICA LATINA ASSIGNS Aa1.br RATING TO TELESP DEBENTURE PROGRAM

Approximately R$ 3.0 billion of Debt Securities Affected

New York, September 17, 2004 -- Moody's America Latina Ltda. has assigned a Brazil National Scale Rating of Aa1.br and a Baa3 Global Local Currency Scale rating to floating-rate debentures to be issued by Telecomunicacões de São Paulo S.A. ("Telesp") under a R$ 3.0 billion, two-year local market program. The assigned ratings apply to senior unsecured, non-subordinated debentures to be issued under the program, including the first issuance of R$ 1.5 billion due in 2010, with a put option in 2007.

The ratings reflect Moody's America Latina's belief that Telesp will remain the leading wire line telecommunications operator in the state of São Paulo, the wealthiest state in Brazil, and will successfully continue to develop its business plans in non-traditional business segments, such as broadband and value-added next generation services. Although Moody's America Latina anticipates that Telesp is likely to suffer some further market share loss and margin pressure due to increased competition from competitive local exchange carriers and cellular carriers, it is our expectation that Telesp's ongoing focus on efficiency measures and service quality will ensure strong cash flow generation in its core intrastate operations going forward. Finally, Moody's America Latina takes comfort from the company's prudent financial criteria and the commitment to maintaining strong financial ratios and adequate hedging policies for currency and interest rate risks.

The ratings are principally constrained by Telesp's historical high dividend pay-out and resulting moderate liquidity profile, the company's exposure to regulatory risk and its limited opportunities for growth. Telesp will apply proceeds of the first debenture issuance under the program to repay existing short term bank debt. Thus, Moody's America Latina expects that short term debt maturities will reduce to a level of below R$ 1.0 billion after the issuance. In the future, Moody's America Latina expects that Telesp will manage its dividend payments in order to maintain sufficient cash and free cash flow to cover short term debt maturities. Telesp currently has a strong financial profile with significant financial flexibility. However, it is our opinion that the company will continue to utilize most of this flexibility to keep a high dividend pay-out ratio, although the company has not explicitly stated its dividend policy. In 2003, Telesp paid dividends of R$ 3.1 billion, equal to 63% of the company's cash flow from operations.

Moody's America Latina believes that regulated entities like Telesp could face the risk of government, court or legislative intervention in the tariff setting process, as demonstrated by the events surrounding the company's July 2003 tariff increase. The Brazilian Supreme Court recently ruled that the IGP-DI general price inflation index should have been used to index the July 2003 wire line telecommunications tariff increase, thus overturning its previous preliminary order that had limited the tariff increase to the IPCA consumer price inflation index. The court's final decision indicates an improvement in the regulatory and legal environment for telecommunications operators in Brazil. However, Moody's America Latina is still concerned with uncertainties related to the renovation of fixed-line concession contracts in 2006, such as possible new capital expenditure requirements for universalization of service, required unbundling of local service infrastructure, or a significant change in the current tariff regime.

The rating outlook is stable because Moody's America Latina expects that Telesp will maintain its position as the dominant local service provider in its concession area and experience a stable, although low, level of revenue and cash flow growth in real terms by compensating for increased local service competition with growth in non-traditional businesses, such as broadband and next generation services. The successful implementation of management's new approach to liquidity management is also incorporated into the stable outlook.

Future positive rating actions or changes in outlook could result from an improved liquidity profile, likely resulting from alternative sources of liquidity or a change in Moody's America Latina's expectation regarding the company's dividend policy, in addition to above expected growth in the company's non-traditional and unregulated business segments. Future negative rating actions or changes in outlook could result from a weak liquidity profile or a significant deterioration in the company's position as the dominant local service provider in its concession area, as evidenced by above expected losses of installed lines or traffic.

During the twelve month period ending December 31, 2003, Telesp had net revenues of R$ 11.8 billion and adjusted total debt of R$ 3.06 billion. Adjusted gross cash flow (excluding the impact of currency and monetary variation) of R$ 4.8 billion was equal to 157% of total debt and free cash flow of R$ 0.52 billion covered 17% of total indebtedness. EBITDA-Capex interest coverage was 8.0 times and Gross Cash Flow + interest expense to interest expense was 10.7 times.

Headquartered in Madrid, Spain, Telefónica S.A. is the second largest European telecommunications company by market capitalization. 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. Telefonica has significant investments throughout Latin America, including major subsidiaries in Chile, Argentina, Mexico, Peru and Brazil.

Headquartered in São Paulo, Brazil, Telesp is the main telecommunications service provider in the Brazilian State of São Paulo. The company operates some 12.2 million-access lines and is an 87.5%-owned subsidiary of Telefonica S.A.

Sao Paulo
Alexander I. Carpenter
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3443-7444

New York
Julia Turner
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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