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Rating Action:

Moody's assigns Aaa.br to Telemar's proposed debentures; upgrades Brasil Telecom to Baa2

 The document has been translated in other languages

09 Dec 2009

Approximately BRL 2.25 billion in debt securities affected

Sao Paulo, December 09, 2009 -- 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. ("TNE"), and their stable outlook. Simultaneously, Moody's America Latina Ltda assigned a Baa2 global scale rating and Aaa.br Brazilian national scale rating to the proposed issuance of approximately BRL 2.25 billion (upsizable to approximately BRL 3 billion) in senior unsecured local currency debentures by TMAR. The debentures will be issued in two series with maturities in 2015 and 2020, for which the respective sizes will be defined during the course of the placement. The net proceeds of the issuance will be used to refinance 2010 debt maturities. At the same time, Moody's upgraded the senior unsecured ratings of Brasil Telecom S.A. ("Brasil Telecom") to Baa2 from Baa3 on the global scale and to Aaa.br from Aa1.br on the Brazilian national scale, and the foreign currency rating of Brasil Telecom's USD 200 million 9.375% Structured Notes due 2014 to Baa2 from Baa3. The rating outlook for all ratings is stable.

Ratings affirmed are as follows:

Issuer: Telemar Norte Leste S.A.:

- Senior Unsecured Issuer Rating: 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)

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)

Ratings assigned are as follows:

Issuer: Telemar Norte Leste S.A.:

- Approximately BRL 2.25 billion in Senior Unsecured Local Currency Debentures to be issued in two series due in 2015 and 2020: Baa2 (global scale); Aaa.br (Brazilian national scale)

Ratings upgraded are as follows:

Issuer: Brasil Telecom S.A.

- Senior unsecured issuer rating: to Baa2 from Baa3 (global scale); to Aaa.br from Aa1.br (Brazilian national scale)

- USD 200 million 9.375% Structured Notes due 2014: to Baa2 from Baa3 (foreign currency rating)

Outlook stable for all ratings.

The ratings of TMAR's proposed debentures and stable outlook assume 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.

The Baa2 global scale rating for the debentures is supported by the dominant market position of TMAR's incumbent wireline operations in a large portion of the Brazilian territory, ensuring strong cash flow from operations to support expansion of wireless and broadband operations. The acquisition of Brasil Telecom added scale to TMAR and strengthened its geographic coverage, with the potential for substantial synergies in the near term. Although the additional debt raised by TMAR to fund the acquisition resulted in the deterioration of its overall debt protection metrics on a consolidated basis pro-forma for Brasil Telecom, overall credit metrics remain commensurate with its current rating. Moody's, however, expects TMAR to de-lever its balance sheet over the near term, placing the company's consolidated credit metrics more strongly in the Baa rating category. The rating also considers the company's prudent financial policies and track record for maintaining solid liquidity.

TMAR's rating is principally constrained by ongoing challenges to offset declining high-margin fixed-line telephony revenues with mobile and broadband segment growth without sacrificing margins or cash flow. The rating additionally considers the fixed to mobile substitution effect and the fierce competition in the overall Brazilian telecom sector from existing players, and new players and technologies. The rating takes into account the expectation that increasing competitive pressure and erosion of its traditional higher-margin fixed-line business will continue to pressure overall margins. In addition, the possible entrance of a fifth large mobile telecom player (GVT/Vivendi) into the Brazilian market could pressure margins in that business over time. Although the Brazilian regulatory environment is still evolving, in Moody's view, changes in the regulatory framework have so far been supportive to the maintenance of adequate returns for investments in the sector.

The Baa3 local currency issuer rating for TNE is one notch lower than TMAR's Baa2 issuer rating to reflect the structural subordination of TNE bondholders in relation to TMAR, where operating assets and cash generation are concentrated.

While the Baa2 global scale rating reflects the default and loss expectation of the proposed debentures on a global basis, the Aaa.br national scale rating reflects the standing of their credit quality relative to other domestic issues. Issues rated Aaa.br demonstrate the strongest creditworthiness relative to other domestic issues. 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 Brazil are designated by the ".br" 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.

The upgrade of Brasil Telecom reflects our view of its successful integration with TMAR and therefore of similar credit risk of the two companies. The centralization of Brasil Telecom's operational and financial management at TMAR, including unified marketing strategies, capital expenditures, cash management and funding decisions, combined with the existence of cross default / acceleration provisions in outstanding debt issues of TMAR and TNE, support our view.

The stable outlook reflects Moody's expectations that TMAR will be able to achieve substantial synergies from the integration with Brasil Telecom in the near term, helping to support strong operating margins and strengthen cash flow for debt reduction to move towards its target of reducing Total Adjusted Net Debt to EBITDA to below 2.0x, and will maintain prudent financial management including adequate liquidity and moderate dividends. While we recognize TMAR's progress in integrating Brasil Telecom's operations, significant challenges to achieve anticipated synergies and reduce indebtedness remain so that an upgrade of TMAR's local currency rating is unlikely in the near term.

Lower than expected synergies preventing de-leverage or a fiercer than expected competitive environment could pressure the rating or outlook. Specifically, if Total Adjusted Net Debt to EBITDA were to be above 2.5x (2.8x as of September 30, 2009 LTM) for an extended period of time, or Funds From Operations less Dividends to Total Adjusted Debt ratio were to fall below 25% on a consistent basis, the ratings or outlook may come under downward pressure. Given that TMAR does not have committed standby credit facilities, a shortfall in covering its short term debt with cash and free cash flow would put pressure on the ratings.

Moody's last rating action on TMAR occurred on September 22, 2009 when we upgraded the foreign currency bond rating of TMAR to Baa2 from Baa3. The upgrade was prompted by a concurrent action to upgrade Brazil's long-term foreign currency country ceiling for bonds and notes to Baa2 from Baa3. Our last rating action on Brasil Telecom occurred on January 9, 2009 when we affirmed its Baa3 global scale issuer rating and Aa1.br Brazilian national scale rating and stable outlook following the announced conclusion of the acquisition by TMAR of the totality of the shares of Invitel S.A. (not rated), the ultimate holding company that held a controlling interest in Brasil Telecom. The last rating action on Brasil Telecom's Structured Notes occurred on May 30, 2008, when their foreign currency rating was upgraded to Baa3 from Ba1. The last rating action on TNE was on April 29, 2008 when we affirmed its Baa3 rating and stable outlook following the announcement of the agreement to acquire a majority stake in Brasil Telecom.

The principal methodology used in rating TMAR and Brasil Telecom was Moody's Global Telecommunications Industry rating methodology (published December 2007), while the principal methodology used in rating the structured notes issued by TNE and Brasil Telecom is "Moody's Approach to Rating Securities that Benefit from Political Risk Insurance, Rolling Reinstatable Guarantees, and B Loan Participations" (June 2002), 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 website.

Headquartered in the city of Rio de Janeiro, Brazil, and majority owned by Tele Norte Leste Participações S.A., Telemar Norte Leste S.A. is the country's largest incumbent local exchange carrier by number of subscribers (21.4 million at September 30, 2009). The company also provides wireless services and broadband services to 34.8 million and 4.1 million subscribers, respectively. The company reported net revenues of BRL 29.9 billion (about USD 13.9 billion converted by the average exchange rate) in the last twelve months ended on September 30, 2009 pro-forma for 12 months of Brasil Telecom. Brasil Telecom is an integrated telecommunications company operating in nine states in the southern, middle-western and northern regions of Brazil and in the Federal District.

Sao Paulo
Richard Sippli
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

Sao Paulo
Alexander I. Carpenter
Senior Vice President - Regional Credit Officer
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

Moody's assigns Aaa.br to Telemar's proposed debentures; upgrades Brasil Telecom to Baa2
No Related Data.
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