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Rating Action:

Moody's de Mexico has today changed the outlook to stable from negative for Telefonica Finanzas Mexico S.A. de C.V. and affirmed the Aa2.mx ratings

 The document has been translated in other languages

27 Mar 2015

Mexico, March 27, 2015 -- Moody's de Mexico has today changed the outlook to stable from negative on the national scale ratings of Telefonica Finanzas Mexico S.A. de C.V. and affirmed the Aa2.mx ratings on its Certificados Bursatiles. These rating actions were based on March 25, 2015's rating actions taken by Moody's to change the outlook to stable from negative on the issuer's parent, Telefónica S.A. (Telefónica) and affirm all ratings. The Certificados Bursatiles issued by Telefónica Finanzas México are unconditionally and irrevocably guaranteed by Telefónica.

The change in outlook reflects Moody's expectation of an improved operating environment in Spain, which will drive better revenue trends, as well as the expected use of the cash proceeds from the recently announced sale of Telefonica's UK subsidiary O2 UK (O2) to improve leverage.

"The stable outlook reflects our expectation that the overall macro economic conditions in Spain are expected to continue to improve, underpinning the underlying trend towards revenue growth in the domestic market. In addition, the stable outlook reflects management's commitment to a maximum reported leverage of 2.35x, which we expect will be achieved through the use of the cash proceeds from the disposal of Telefonica's UK subsidiary O2", says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telefonica.

RATINGS RATIONALE

Telefonica's Baa2 rating primarily reflects (1) the group's large size and scale; (2) the diversification benefits associated with its strong positions in many different markets; (3) the enhanced technology, exclusive TV-content and bundled offers that improves its market positioning; (4) management's track record and ability in terms of executing a well-defined and concise business strategy; and (5) its operating cash flow generation and management's commitment to maintaining its reported net debt/EBITDA ratio below 2.35x in the medium term.

Telefonica's Baa2 rating also continues to reflect (1) management's ability to continue to execute a strategy that benefits from a strong position in the Spanish market and has a strong international foothold including Latin America and Germany; (2) that the group will deliver the financial policy (including cash preservation measures and a non-core assets disposal program) that management has publicly committed to, which supports its deleveraging and strategy to strengthen its finances; and (3) that Telefonica will maintain its access to the debt capital markets and as such, retain adequate liquidity, supported by recent bond issuances and asset sales.

The sale of O2 to Hutchinson Whampoa Group is credit positive as it enables Telefonica to realize significant cash proceeds by monetizing a non core asset, while reducing its exposure to the UK market where we believe competitive dynamics are changing for mobile operators following the acquisition of EE by BT. Telefonica has indicated in its press release that it intends to allocate a substantial part of the cash proceeds to achieve a reported leverage ratio of Net Debt / EBITDA lower than 2.35x. This evidences management's intention to pursue a financial strategy supported by a stronger balance sheet through asset optimization and deleveraging.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the ratings reflects Moody's expectation that although Telefonica will continue to operate in a challenging domestic market, the underlying economic conditions will continue to improve and increasing consumer spending will support medium term growth in revenues. In addition, Moody's expects that leverage will improve and to be maintained within management's guided maximum reported 2.35x. Telefonica's stable outlook also factors in the group's international diversification which enhances its credit profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider an upgrade of Telefonica's rating to Baa1 if the company's credit metrics were to strengthen significantly as a result of improvements in its operational cash flows and a reduction in debt. More specifically, the rating could benefit from positive pressure if it became clear that the group could achieve sustainable improvements in its debt ratios, such as an adjusted RCF/net debt ratio above the mid-twenties in percentage terms and an adjusted net debt/EBITDA ratio comfortably below 2.5x.

Conversely, a rating downgrade could result if (1) Telefonica deviates from its financial-strengthening plan, as a result of weaker cash flow generation or the incurrence or assumption of further substantial debt in conjunction with the pursuit of acquisitions or more aggressive shareholder distribution policies; and/or (2) the group's operating performance in Spain and other key markets continues to deteriorate and there is no likelihood of any short-term improvement in underlying trends. Resulting metrics would include an RCF/net adjusted debt ratio of less than 18% or a net adjusted debt/EBITDA ratio trending towards 3.0x. In addition, a rating downgrade could result if we were to downgrade the sovereign rating.

Affirmations:

..Issuer: Telefonica Finanzas Mexico, S.A. de C.V.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2/Aa2.mx

Telefonica S.A., domiciled in Madrid, Spain, is a leading global integrated telecommunications provider, delivering a full range of fixed and mobile telecommunications. Telefonica is one of the world's leading telecommunications carriers, with some 334 million customers worldwide as of December 2014. In Latin America (LatAm), Telefonica provided services to around 227 million customers as of the end of December 2014 and is the leading operator in Brazil, Argentina, Chile and Peru, with substantial operations in Colombia, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Uruguay, Costa Rica and Venezuela. In addition to its LatAm presence since 1991, Telefonica has a strong footprint in the UK and Germany, providing services to around 72 million customers as of December 2014. Approximately 75% of group revenues and 64% of group reported EBITDA were generated outside Spain. Nevertheless, it's worth noticing that the EBITDA minus Capex amount generated in Spain represents nearly 58% of total.

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com.mx for a copy of this methodology.

The period of time covered in the financial information used to determine Telefonica Finanzas Mexico, S.A. de C.V. 's rating is between 31/12/2012 and 30/09/2014 (source: Financial Statements of Telefonica S.A.).

The sources and items of information used to determine de Telefonica Finanzas Mexico S.A de C.V ratings the unconditional and irrevocable guaranty from Telefonica S.A. ultimate parent entity and financial statements from Telefonica S.A as of December 31 2010 to December 31 2014.

Moody's National Scale Credit 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 credit 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 ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

REGULATORY DISCLOSURES

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

The ratings have been disclosed to the rated entity prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 22/10/2012.

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

This Rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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 www.moodys.com.mx 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.mx 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 our website www.moodys.com.mx for further information.

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

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

Please see the ratings tab on the issuer/entity page on www.moodys.com.mx for additional regulatory disclosures for each credit rating.

Gabriel Vigueras
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Marianna Fernandes Rodrigues Waltz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's de Mexico has today changed the outlook to stable from negative for Telefonica Finanzas Mexico S.A. de C.V. and affirmed the Aa2.mx ratings
No Related Data.
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