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Rating Action:

Moody's downgrades Telefonica Brasil's ratings to Ba1; outlook is negative

 The document has been translated in other languages

26 Feb 2016

Sao Paulo, February 26, 2016 -- Moody's America Latina Ltda. downgraded Telefonica Brasil S.A.'s ("Telefonica Brasil") senior unsecured debentures to Ba1 from Baa2. At the same time, Moody's withdrew Telefonica Brasil's issuer rating and assigned a Ba1/Aa1.br corporate family rating. The national scale ratings were downgraded to Aa1.br from Aaa.br for the senior unsecured debentures. The ratings outlook was changed to negative.

The rating action follows Moody's downgrade on February 24, 2016 of Brazil's government bond rating to Ba2 from Baa3. In addition to downgrading Brazil's government bond rating, Moody's also downgraded the country's senior unsecured debt rating to Ba2 from Baa3, and the senior unsecured shelf rating to (P)Ba2 from (P)Baa3. The outlook was changed to negative. The rating agency also changed Brazil's country ceiling that went to Ba1 from Baa2.

This rating action concludes the review for downgrade initiated on December 10, 2015. Please see "Moody's downgrades Brazil's issuer and bond ratings to Ba2 with a negative outlook" on moodys.com for more information.

Ratings downgraded:

- BRL 2.0 billion non-convertible unsecured debentures due in 2017: to Ba1 from Baa2 (global scale).

- BRL 2.0 billion non-convertible unsecured debentures due in 2017: to Aa1.br from Aaa.br (national scale).

Ratings Withdrawn:

Telefonica Brasil S.A.

- Issuer Rating (global scale): previously Baa2

- Issuer Rating: previously Aaa.br (national scale)

Ratings Assigned:

Telefonica Brasil S.A.

Corporate Family Rating: Ba1 (global scale)

Corporate Family Rating: Aa1.br (national scale)

RATINGS RATIONALE

"The downgrade of Telefonica Brasil's global scale ratings to Ba1 was prompted by the downgrade of Brazil's government bond rating to Ba2 from Baa3," explained Moody's Vice President and Senior Analyst, Marcos Schmidt.

"Telefonica Brasil's Ba1 rating still ranks one-notch above Brazil's government bond rating of Ba2, which is granted only on exceptional basis for issuers with fundamentals that are much stronger than the sovereign. In the case of Telefonica Brasil, this is evidenced by its position as the largest integrated telecom company in Brazil in terms of revenue and number of wireless subscribers, as well as a strong brand name and service quality in the wireless segment. In addition, Telefonica Brasil has a conservative financial profile, robust credit metrics, solid liquidity position, strong brands and good geographic presence in the country." added Marcos.

As per Moody's methodology "How Sovereign Credit Quality Can Affect Other Ratings", published on 16 March, 2015, deterioration in sovereign credit quality can directly affect the credit standing of issuers domiciled within the country, but issuers with fundamentals that are much stronger than the sovereign could be rated above it on an exceptional basis.

On the other hand, the ratings are constrained by Brazil's government bond rating of Ba2 , and by Telefonica Brasil's still meaningful exposure to the wireline business, which accounted for 42% of net revenues in the LTM ended December 2015. We expect revenue and profitability in this segment to continue to decline due to lines in service (LIS) disconnections, tougher competition in the broadband segment, and expensive TV content as the telco companies enhance their triple and four play packages offerings. Additional credit negatives are the company's negative free cash flow due to high capex and high dividend payout, which is likely to be maintained during the next several years. Negative free cash flow is, however, mitigated by Telefonica Brasil's low leverage.

The negative outlook reflects the change in outlook of Brazil's government bond rating to negative.

An upgrade on Telefonica Brasil's rating would depend on an upgrade of Brazil's government bond rating. In addition, Telefonica Brasil's ratings are constrained by the highly competitive operating environment in Brazil in all segments and the still-high revenue contribution of the mature and declining wireline business.

Telefonica Brasil's ratings could come under downward pressure if Telefonica S.A.'s credit profile and liquidity position deteriorate, if Brazil's government bond rating should be further downgraded or if competitive threats adversely affect Telefonica Brasil's operating performance more than expected, causing a meaningful decline on revenues and margins. Ratings would also be negatively affected in the event that the company pursues a material debt financed return on capital strategy or M&A activity.

Telefonica Brasil is the largest integrated telecom operator in Brazil with BRL 40.2 billion (USD 12.0 billion) in revenues during the LTM ended December 2015. Revenues from mobile and fixed services represented 58% and 42% of the total, respectively, in the LTM ended December of 2015. The acquisition of GVT in May 2015, a non-cash equity financed transaction, has enhanced its broadband capacity and presence in the pay-TV market. Spain-based Telefonica S.A. (Baa2 stable) is the largest shareholder, holding, directly and indirectly, 94.5% of voting shares and 73.6% of total shares.

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

POTENTIAL MAPPING RECALIBRATION FROM GLOBAL SCALE TO NATIONAL SCALE RATINGS

With the recent downgrade of the government of Brazil on the global rating scale and other issuers whose risk profiles are affected by related credit considerations, the distribution of national scale ratings (NSRs) among issuers in Brazil has become compressed, particularly at the Aa2.br level. As a result, the current mapping of global scale ratings to national scale ratings may no longer be adequately serving one of its intended purposes, which is to provide greater credit differentiation among issuers in Brazil than is possible on the global rating scale. However, if Moody's NSR methodology is revised as proposed in the Request for Comment (RFC) entitled "Mapping National Scale Ratings from Global Scale Ratings" published on January 20, the resulting new Brazilian scale would likely imply that many Brazil global scale ratings would be remapped to higher ratings on the national scale.

While the RFC included a new proposed national scale map for Brazil, given the aforementioned ratings changes, the new map design for Brazil will likely differ from the specific map proposal included in the RFC. In addition to the proposed Brazilian map, the RFC comprised a proposed update to our methodology for mapping national scale ratings from global scale ratings, including guidelines for the design of new national scale maps and changes to existing maps, as well as proposed new national scale maps for each of the other countries in which we currently offer NSRs. The comment period for this RFC closed on February 22.

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, and confidential and proprietary Moody's 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please see the special report "Services provided to entities rated by Moody's America Latina Ltda." on our website www.moodys.com.br for further information.

Entities rated by Moody's America Latina Ltda. (and the rated entities' related parties) may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities. Please go to www.moodys.com.br for a list of entities receiving products/services from these related entities and the products/services received. This list is updated on a quarterly basis.

The date of the last Credit Rating Action was 10/12/2015.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

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 credit rating action on the support provider and in relation to each particular credit 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.br.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit 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.

Please see ratings tab on the issuer/entity page on www.moodys.com.br 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.br for further information.

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

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

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

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

Marcos Schmidt
Vice President - Senior Analyst
Corporate Finance Group
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

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
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 downgrades Telefonica Brasil's ratings to Ba1; outlook is negative
No Related Data.
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