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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
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
Alexander I. Carpenter
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Corporate Finance Group
Moody's Investors Service
No Related Data.
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