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13 Jul 2011
Sao Paulo, July 13, 2011 -- Moody's América Latina has assigned a Baa1 local currency and Aaa.br
Brazil national scale issuer ratings to Telecomunicações
de São Paulo S.A. -- TELESP ("Telesp").
The outlook for the ratings is stable.
-Issuer Rating: Baa1
-Brazil National Scale Rating ("NSR"): Aaa.br
Please see ratings tab on the issuer/entity page on moodys.com
for information on Global Scale Rating.
"Telesp's Baa1 issuer rating reflects its position as Brazil's
largest integrated telecom operator both in terms of revenues and number
of lines in service with pro-forma adjusted EBITDA margins of around
38%.", said Moody's Analyst, Marcos Schmidt.
"The rating also considers Telesp's conservative financial
profile, strong brand names, improved business and geographic
diversification after the consolidation of Vivo Participações
S.A. ("Vivo"), and management focus on
operational efficiency and cost-savings.", added
On the other hand the rating also takes into account the still somewhat
high reliance on the mature wireline business of around 32% on
a pro-forma basis, the regional nature of its operations
and the expectation that revenues and EBITDA for this segment are likely
to continue to moderately decline over the foreseeable future due to limited
growth opportunities and increasing competitive challenges. The
rating also incorporates our view that Telesp will continue to use most
of its cash flow from operations ("CFO") for dividend distribution.
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.
On June 08, 2011 Vivo's shareholders became Telesp's
shareholder's on a non-cash share exchange agreement receiving
1.55 shares of the new entity for each of their Vivo's shares
resulting in the full consolidation of Vivo and the creation of the new
integrated telecom operator.
Telesp is a public company with shares listed on the NYSE and Bovespa.
Telefónica, Spain (Baa1/Stable) holds directly and indirectly
91.6% of Telesp's voting shares and 73.8%
of its total shares, while free float represents 8.4%
and 26.2%, respectively. In our view,
Telesp has adequate transparency and above average corporate governance
standards when compared to most other Brazilian issuers, including
the implementation of a Code of Conduct, a Disclosure Policy,
and a Code of Ethics. In addition, Telesp's Board of Directors
is assisted by internal committees such as a Fiscal Committee, an
Audit and Control Committee (formed by a representative of the external
audit firm and members of the Board of Directors elected by minority shareholders),
and a Disclosure Committee.
Telesp's prudent financial management is evidenced by its historically
low leverage as measured by pro-forma Total Adjusted Debt to EBITDA
of 1.3x after the incorporation of Vivo and gravitating towards
1.0x in the last several years. Its liquidity is good.
As of March 31, 2011, Telesp had a pro-forma consolidated
cash position of BRL 4.3 billion fully covering BRL 2.3
billion in adjusted short-term debt. The company's liquidity
policy is to maintain cash plus projected free cash flow above short-term
debt maturities. Despite the aggressive dividend pay-out,
which has averaged 91% in the past five fiscal-years since
2006, Telesp has track record of generating positive annual free
cash flows, after capital spending and dividends, and has
ample access to financing from banks and capital markets. Accordingly,
we expect Debt to EBITDA to remain at 1.3x over the next 12 to
Telesp has been able to partially offset the decline of long-distance
and regulated interconnection revenues with growth in its data transmission
business and the stability of its important local services segment.
With the integration of Vivo, the wireless business will help the
company's growth plans and sustainability of revenues and margins
going forward. However, we expect consolidated revenues to
grow only moderately over the near to intermediate term as competition
increases with the entrance of new players and technologies and also due
to the still high contribution of the wireline business.
Telesp, as an integrated company is now the largest telecom operator
in Brazil both term of revenues and number of accesses. As the
incumbent local exchange carrier in the state of São Paulo,
Telesp enjoys a dominant market share of the state's local access fixed
lines. Additionally, as the first mover in the fast-growing
data and broadband services market, Telesp, through its Speedy
and Ajato brands, had approximately 3.4 million broadband
subscribers as of March 31, 2011, with a leading market share
in the state of São Paulo. In long-distance,
Telesp has about 28% market share nationwide, behind the
long-distance incumbent provider Empresa Brasileira de Telecomunicações
- Embratel (Baa2/stable), with 31%. In the
wireless business through its Vivo brand, Telesp has nationwide
coverage with 62 million subscribers with a leading market share of 29.5%
ahead of Claro's 25.4%, TIM's 25.1%,
and Oi's 19.7% shares.
In Brazil, regulator Anatel's emphasis on promoting competition
within the telecom sector is expected to lead to substantive changes to
the Brazilian telecommunications legal and regulatory framework over the
near to medium term. Important regulatory issues under discussion
in the near term include the redefinition of mobile-termination
rates (VU-M) and the possible relaxation of rules that limit foreign
stakes to less than 49% of the voting shares of cable companies.
Although the 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 the sector.
Telesp's stable outlook reflects the company's strong and stable cash
flow generation ability and Moody's expectations that the company will
maintain a financial profile consistent with its current rating category.
Moody's stable outlook is also based on our expectation that Telesp will
continue to balance its high dividend payout with a conservative leverage
policy and continue to invest in its network infrastructure to address
growing competitive threats.
An upgrade is probably unlikely in the near term, given the Telesp's
integration of Vivo, increasing competitive challenges in all segments
and still some revenue concentration in the mature and declining wireline
business, revenues and EBITDA margin are likely to only moderately
increase over the foreseeable future. Over the long run,
increased revenue diversification into higher growth segments such as
broadband and video, while improving current debt protection measures
could result in upward rating pressure.
Telesp's ratings could come under downward pressure if competitive threats
affect the company's operating performance more negatively than expected
so that revenues and margins experience a meaningful decline, or
if the company were to engage in a material debt financed capital return,
or M&A activity, so that Debt to EBITDA were to increase above
2x for an extended period.
The principal methodology used in rating Telesp was the Global Telecommunications
Industry Methodology published in December 2010.
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 differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".br"
for Brazil. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Implementation Guidance
published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings."
Headquartered in São Paulo, Brazil, Telecomunicações
de São Paulo S.A. -- TELESP ("Telesp")
is the largest integrated telecom operator in Brazil, being the
local exchange carrier for the Brazilian State of São Paulo with
about 11 million lines in service and also a nationwide wireless services
provider with 62 million wireless subscribers. Telefonica S.A
is (Baa1/STA) is the largest shareholder owning direct and indirectly
almost 92% of the voting shares and 74% of the total shares.
During the last twelve months ended in March 2011 the company had approximately
BRL 32.1 billion in pro-forma net revenues.
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the lead rating analyst and to the Moody's legal entity that has issued
Corporate Finance Group
Moody's America Latina Ltda.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service, Inc.
Moody's America Latina Ltda.
Moody's assigns a Baa1/Aaa.br rating to Telesp
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
No Related Data.
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