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Rating Action:

Moody's assigns a Baa1/Aaa.br rating to Telesp

 The document has been translated in other languages

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.

Ratings Assigned:

-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.

RATINGS RATIONALE

"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 Schmidt.

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 18 months.

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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Sao Paulo
Marcos Schmidt
Analyst
Corporate Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's assigns a Baa1/Aaa.br rating to Telesp
No Related Data.
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