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09 Dec 2010
Approximately Euros 750 million in debt securities affected
Sao Paulo, December 09, 2010 -- Moody's Investors Service has assigned a Baa2 foreign currency rating
to the proposed senior unsecured notes of approximately Euros 750 million
due December 2017 to be issued by Telemar Norte Leste S.A.
("TMAR"). Simultaneously, Moody's Investors Service has affirmed
its issuer ratings of Baa2 for Telemar Norte Leste S.A.
("TMAR") and Baa3 for Tele Norte Leste Participações S.A.
("TNL"). The ratings outlook is stable.
The proposed new issuance is part of TMAR's liability management to improve
its debt maturity profile, and will not affect its leverage metrics
since the majority of the net proceeds will be used to pay-off
maturing debt. The rating of the proposed notes assumes that the
final transaction documents will not be materially different from draft
legal documentation reviewed by Moody's to date and assume that these
agreements are legally valid, binding and enforceable.
Ratings assigned are as follows:
- Approximately Euros 750 million (approximately USD 1 billion)
in Senior Unsecured Foreign Currency Notes due in 2017: Baa2 (global
Ratings affirmed are as follows:
Issuer: Telemar Norte Leste S.A.:
- Senior Unsecured Issuer Rating: Baa2 (global scale)
- USD 1.0 billion 5.500% in Senior Unsecured
Foreign Currency Notes due in October 2020: Baa2 (global scale)
- BRL 2.16 billion senior unsecured local currency debentures
issued in two tranches due in 2011 and 2013: Baa2 (global scale);
Aaa.br (Brazilian national scale)
- BRL 2.57 billion senior unsecured local currency debentures
issued in two tranches due in 2011 and 2012: Baa2 (global scale);
Aaa.br (Brazilian national scale)
- BRL 2.25 billion in Senior Unsecured Local Currency Debentures
issued in two series due in 2015 and 2020: Baa2 (global scale);
Aaa.br (Brazilian national scale)
Issuer: Tele Norte Leste Participações S.A.
- Senior Unsecured Issuer Rating: Baa3 (global scale)
- USD 300 million 8.000% Structured Notes due 2015:
Baa3 (foreign currency rating)
Issuer: Brasil Telecom S.A.
- Senior unsecured issuer rating: Baa2 (global scale);
Aaa.br (Brazilian national scale)
- USD 200 million 9.375% Structured Notes due 2014:
Baa2 (foreign currency rating)
The outlook for all ratings is stable.
TMAR's Baa2 rating reflects the leading market position of its incumbent
wireline operations in its concession region, the historically robust
EBITDA margin, the company's prudent financial policies contributing
to its overall strong debt protection metrics and its good level of corporate
governance standards when compared to other Brazilian issuers.
The rating also reflects the potential for synergies resulting from the
increased negotiating power and economies of scale associated with the
Portugal Telecom (PT) alliance announced in July 2010 whereby PT will
acquire direct and indirect stakes in TMAR representing the equivalent
to 22.4% of the company's total shares, although not
representing transfer of control in any existing companies of the group.
The deal was recently approved by the local regulator ANATEL, includes
an equity injection of up to BRL 12 billion in TNL and TMAR and closing
is expected to take place until the second quarter of 2011.
At the same time, the ratings are principally constrained by the
regulatory, political and economic risks associated with operating
in Brazil, the challenges to compensate for the decline of the higher-margin
fixed-line telephony revenues and the fierce competition in the
Brazilian telecom sector from existing large players. The rating
also takes into account expectations that increasing competitive pressure
and attrition of its traditional higher-margin fixed-line
business will continue to pressure overall margins.
The stable outlook reflects Moody's expectations that TMAR will continue
to report strong operating margins while it combines its business plans
with PT's, as well as maintain prudent financial management including
a healthy liquidity position and restrained dividends. The stable
outlook also considers that TMAR will de-lever its balance sheet
towards the target leverage of Total Adjusted Debt to EBITDA of below
We view the alliance with Portugal Telecom as a credit positive through
the reduction in leverage and possible synergies resulting from the increased
negotiating power and economies of scale of the alliance. Before
considering a possible upgrade to the ratings, we would need to
see continued improvement in cash from operations (BRL 11.2 billion
LTM September 30th 2010) and positive free cash flow generation (BRL 984
million LTM September 30th 2010) as well as a firm improvement in operating
margin. Additional upward pressure on the rating could occur if
Total Adjusted Debt to EBITDA were to fall below 2.0X (3.3X
LTM September 30th 2010) on a sustained basis. Furthermore,
the usage of the additional cash and possible strategic investments of
the company and its capital structure management remain relevant issues
Lower than expected synergies preventing de-leverage or an intensifying
competitive environment could pressure the rating. Specifically
if Total Adjusted Debt to EBITDA were to be above 3.0x (3.3X
LTM September 30th 2010) for an extended period of time, or the
Funds From Operations less Dividends to Total Adjusted Debt ratio were
to fall below 25% on a consistent basis (36.4% LTM
September 30th 2010), the ratings or outlook may come under downward
pressure. Given that TMAR does not have committed standby credit
facilities for working capital needs, a shortfall in covering its
short term debt with cash and free cash flow would also put pressure on
The principal methodology used in rating TMAR was Moody's Global Telecommunications
Industry rating methodology (published December 2007), which can
be found at www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Moody's last rating action on TMAR occurred on September 02, 2010
when we affirmed TMAR's existing Baa2 ratings with a stable outlook.
Headquartered in the city of Rio de Jan iro, Tele Norte Leste Participações
S.A is the holding company for Telemar Norte Leste S.A.
Brazil's largest incumbent local exchange carrier by number of subscribers
(20.4 million as of September 30, 2010). The company
also provides wireless services and broadband services to 37.4
million and 4.3 million subscribers, respectively as of September
30, 2010. The company reported net revenues of BRL 29.7
billion (about USD 17.5 billion converted by the average exchange
rate) in the last twelve months ended on September 30th, 2010.
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
Moody's Assigns Baa2 Rating to Telemar Norte Leste Senior Unsecured Euro Bonds
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
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