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Rating Action:

Moody's downgrades Telefonica Finanzas Mexico to Baa3/Aa3.mx; stable outlook

 The document has been translated in other languages

08 Nov 2016

Mexico, November 08, 2016 -- Moody's de Mexico, ("Moody's") has today downgraded Telefonica Finanzas Mexico, S.A. de C.V. ("Telefonica Finanzas Mexico")´s ratings to Baa3/Aa3.mx from Baa2/Aa2.mx. The outlook was changed to stable from negative.

The actions follow Moody's announcement on November 07, 2016 that it downgraded the long term senior unsecured ratings of its parent, Telefonica S.A. ("Telefonica"), to Baa3 from Baa2 and changed the outlook to stable from negative. The Certificados Bursatiles issued by Telefonica Finanzas México are unconditionally and irrevocably guaranteed by Telefonica S.A.

Telefonica Finanzas Mexico, S.A. de C.V. (808408101)

Long-Term Debt Rating Senior Unsecured: Baa3

$104mm CERTIFICADOS BURSATILES due 2020 TELFIM 10

Mexico Long Term National Scale Senior Unsecured: Aa3.mx

$104mm CERTIFICADOS BURSATILES due 2020 TELFIM 10

Downgrades:

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

....Senior Unsecured Regular Bond/Debenture, downgraded to Aa3.mx/Baa3 from Aa2.mx/Baa2 (TELFIM-10)

....Senior Unsecured MTN Program, downgraded to Aa3.mx from Aa2.mx

Outlook, changed to Stable from Negative

RATINGS RATIONALE

The downgrade of Telefonica Finanzas Mexico's ratings to Baa3 mirrors the downgrade of its parent Telefonica S.A., as the Mexican subsidiary´s rated instruments are unconditionally and irrevocably guaranteed by Telefonica S.A.

Telefonica S.A.´s downgrade reflects weaker than previously expected financial ratios because it is unlikely to meet its previous deleveraging plan through December 2017. Although Moody's expects underlying operating performance to continue to improve, this -- together with the cut in dividend -- is not sufficient to fully offset the expected delay in deleveraging at the previous rating level.

"Downgrading Telefonica's ratings by one notch to Baa3 reflects the company's revised strategy to pay down debt through organic free cash flow and only sell non-strategic assets on an opportunistic basis. While its dividend reduction is a step in the right direction as it will preserve cash and help to progressively reduce debt, this change in strategy will delay its efforts to de-lever by December 2017," says Carlos Winzer, a Moody's Senior Vice President and lead analyst for Telefonica.

Telefonica recently confirmed that it is no longer committed to a maximum reported leverage ratio of 2.35x (which is broadly equivalent to a Moody's net adjusted debt/EBITDA ratio of around 3.0x) and ruled out the rapid execution of a plan to reduce debt through asset sales and the IPOs of O2 plc and Telxius Telecom S.A. (Telxius).

Moody's had stated back in May 2016 that Telefonica's Baa2 rating could be downgraded without clear evidence of progress made by the company toward deleveraging this calendar year, with the expectation of full deleveraging by the second half of 2017.

The Baa3 senior unsecured rating reflects the rating agency's expectation that Telefonica will continue to improve its underlying operating performance. Recently announced Q3 results support this thesis, with the improving operating performance trend in Spain and Germany gaining traction and operations in Brazil remaining resilient to the economic recession.

Telefonica's Baa3 senior unsecured 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 deployment and ample fibre roll-out in its networks, rich TV-content and bundled offers that improve its market positioning; (4) management's track record and ability in terms of executing a well-defined and concise business strategy; (5) Telefonica's continued access to debt capital markets and as such, continued adequate liquidity, supported by recent bond issuances; and (6) its operating cash flow generation and management's commitment to a lower dividend pay-out reflecting the need to reduce debt gradually without depending on the sale of assets.

Telefonica's Baa3 senior unsecured rating also reflects the highly competitive markets in Spain and Germany and the challenge to report revenue growth across the group. Although the company has made a big effort to invest in enhancing its networks, it is important that the company maintain its focus on delivering on data monetization and the "more for more" value strategy.

The rating also reflects the company's exposure to emerging market risks, and to foreign currency volatility. Moody's also notes that Telefonica fully consolidates assets that it does not fully own, such as Telefonica Deutschland (63%), Telefonica Brasil (74%) and Telefonica de Colombia (68%), Moody's estimates that Telefonica's leverage on a pro rata consolidated basis would be 0.3x higher than leverage reported on a fully consolidated basis.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on the ratings primarily reflects Telefonica's improving operating performance coupled with management's willingness to progressively reduce debt and achieve its deleveraging plan organically overtime. Moody's expects that Telefonica will continue to operate in an improved domestic market, with more rational competition focused on value and better underlying economic conditions that will support medium-term revenue growth. The rating is well positioned in the Baa3 rating category, as Moody's expects that net adjusted debt/EBITDA will progressively improve from 3.7x in 2016 to around 3.2x in 2018.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade on Telefonica Finanzas Mexico's ratings would depend on a upgrade on Telefonica S.A.´s ratings. Moody's would consider an upgrade of Telefonica S.A.'s rating to Baa2 if the company's credit metrics were to strengthen significantly as a result of improved operational cash flows and debt reduction. More specifically, the rating could benefit from positive pressure if it became clear that the group were able to achieve sustainable improvements in its debt ratios, such as an adjusted retained cash flow/net debt ratio above 22% in percentage terms and an adjusted net debt/EBITDA ratio comfortably below 3.0x.

A downgrade on Telefonica Finanzas Mexico's ratings would be triggered by a downgrade on Telefonica S.A.´s ratings. A rating downgrade could result if (1) Telefonica S.A. were to deviate from its financial-strengthening plan, as a result of weaker cash flow generation or difficulty in executing announced debt reduction measures; and/or (2) the group's operating performance in Spain and other key markets were to deteriorate with no likelihood of short-term improvement in underlying trends. Resulting metrics would include an retained cash flow/net adjusted debt ratio of less than 15% and/or a net adjusted debt/EBITDA ratio of 3.75x or higher with no expectation of improvement.

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 for a copy of this methodology.

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 349.4 million customers worldwide as of September 2016. In Latin America (LatAm), Telefonica provided services to around 232.7 million customers as of the end of September 2016 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 74.9 million customers as of September 2016. As of September 2016 , approximately 75% of group revenues and 67% of group reported EBITDA were generated outside Spain. Moody's estimates that EBITDA minus Capex generated in Spain represents nearly 57% of total.

Telefonica Finanzas Mexico is an indirect Mexican subsidiary of Telefonica S.A.

The period of time covered in the financial information used to determine Telefonica Finanzas Mexico, S.A. de C.V.'s rating is between 12/31/2015 and 12/31/2016 (source: audited financial statements of Telefonica S.A.).

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 May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_189530.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information and 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 13/05/2016.

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.mx.

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.

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.

Marcos Schmidt
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

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No Related Data.
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