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Rating Action:

Moody's Affirms B2 Telefonica de Argentina Foreign Currency Rating and Assigns an Aa3.ar NSR for the First Time. The Outlook is Stable

13 Dec 2006
Moody's Affirms B2 Telefonica de Argentina Foreign Currency Rating and Assigns an Aa3.ar NSR for the First Time. The Outlook is Stable

Approximately $ 662.6 million in debt affected.

Buenos Aires, December 13, 2006 -- Moody's Latin America assigned an Aa3.ar National Scale Rating to Telefonica de Argentina S.A. (TASA) and affirmed the B2 foreign currency rating on Telefónica's debt. The outlook remains stable.

Moody´s National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs in Argentina are designated by the ".ar" suffix. NSRs differ from global scale ratings in that they are not globally comparable to the full universe of Moody´s rated entities, but only with other rated entities within the same country.

TASA´s current ratings reflect the fact that the company has managed to stabilize its operations as well as restructure and reduce debt in the aftermath of the 2002 devaluation of the Argentinean peso. The ratings also reflect TASA's ability to generate positive free cash flow, which is available for debt reduction, and increase income and profitability despite the tariff freeze. In our view, the soon-to-be-completed capital reduction will not have a negative impact on TASA's ratings.

Although TASA's financial metrics are currently strong relative to other emerging market telephone companies and in relation to its current ratings, the regulatory uncertainty and potential volatility of the operating environment in Argentina are counterbalancing concerns. The negotiations among government, regulators and telecommunications companies intended at modifying the existing regulatory framework are taking longer than expected. Timing and outcome of those negotiations is highly uncertain.

Un-hedged dollar denominated debt while revenues are in the local currency, and the fact that tariffs are currently frozen, are also factors that could have a negative impact on TASA's financial profile over the medium term.

TASA's ratings are supported by its leading market position, brand name, and the strong cash generation from its relatively stabilized operations. However, TASA's current foreign currency ratings are constrained by the country ceiling (B2).

TASA is 98% owned by Telefonica S.A. (Spain). While Moody's believes that TASA's Argentinean operations will continue to be of strategic importance to Telefonica S.A., we do not factor any financial support from the parent into the ratings.

Recent Events

At a meeting in August, 2006, the board decided on a reduction in capital of $A 1047.6 million, subject to regulatory approvals. With the authorized reduction, TASA will make a cash payment to shareholders. The payment will use accumulated cash on the balance sheet and eventually will require additional debt, depending on the effective date of the reduction.

As a result of the capital reduction, debt to capitalization ratio is expected to increase. The increase, however, is not significant and debt levels will remain acceptable for TASA's current rating category. If the capital reduction were to occur at or before year end, Debt to Ebitda would remain below 2 times and debt to capitalization would increase to approximately 55%, from 46% in 2005.

Rating Outlook

The stable outlook reflects Moody's expectation that, despite the lack of tariffs relief, TASA will continue to generate positive free cash flows in relation to debt and will maintain its debt levels so that debt to EBITDA does not exceed 2 to 2.5 times, over the outlook horizon.

What Could Change the Rating -- Up

A more stable and predictable regulatory framework, a definitive agreement regarding the tariff adjustment mechanism, and continued replacement of dollar denominated debt into local currency debt could result in upward ratings pressure. Additionally, as current foreign currency ratings are constrained by the country ceiling, an up-grade of the ceiling would result in an up-grade of TASA's foreign currency debt ratings.

What Could Change the Rating -- Down

Over the medium term, if tariffs remain frozen and inflation rises significantly, ratings could come under downward pressure.

A more aggressive financial policy to make dividend payments or to finance capital expenditures that leads to increased leverage so that debt to EBITDA goes beyond 2.5 times could also lead to a rating downgrade.

Additional downward pressure could also result from the devaluation of the Argentinean peso, if TASA continues to hold a high proportion of dollar denominated debt, and if there is a significant deterioration in its financial metrics.

Company Profile

Telefonica de Argentina S.A. (TASA) is the incumbent telephone service provider of its area, the southern region of the country, where it has a strong market position. TASA reported revenues for the fiscal year ended December 2005 that of $A 3.3 billion.

Headquartered in Buenos Aires, Argentina, TASA is 98% owned by Telefonica S.A. (Spain).

Buenos Aires
Daniela Cuan
Senior Analyst
Corporate Finance Group

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

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