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Rating Action:

Moody's downgrades certain Portuguese government-related issuers

06 Apr 2011

London, 06 April 2011 -- Moody's Investors Service has today downgraded the ratings of a number of Portuguese government-related issuers following the recent downgrade of the ratings of the government of the Republic of Portugal ("RoP") from A3 to Baa1, on review for further possible downgrade. All ratings remain on review for further possible downgrade, in line with the ratings of the government of RoP.

The rating downgrades are as follows:

- Parpublica-Participacoes Publicas (SGPS), SA ("Parpublica") to Ba1 from Baa1

- Rede Ferroviaria Nacional REFER, EPE to Ba2 from Baa2

- REFER's bonds that are guaranteed by the government of RoP to Baa1 from A3

- Radio e Televisao de Portugal S.A. ("RTP") to Ba2 from Baa3

- Comboios de Portugal ("CP") to Ba2 from Baa3

The rating agency has also lowered to 18 (Caa2 equivalent) from 17 (Caa1 equivalent) the Baseline Credit Assessment ("BCA") of RTP, and to 19 (Caa3 equivalent) from 18 the BCAs of REFER and CP. The BCA is a measure of the company's stand-alone financial strength (without the assumed benefit of government support).

The rating agency has also assigned corporate family ratings and probability of default ratings to Parpublica, REFER, RTP and CP in line with the relevant bond ratings, and the issuer ratings of all of the above companies are being withdrawn in accordance with Moody's ratings policy.

All of the above companies are government-related issuers ("GRIs"), which have a very strong element of government support incorporated within their ratings in accordance with Moody's rating methodology for such entities.

RATINGS RATIONALE

Today's rating actions follow Moody's downgrade from A3 to Baa1, on review for further downgrade of the ratings of the government of the RoP, which was driven by the following: (1) the uncertain political outlook following the resignation of the government, after the rejection by the parliament of the additional budget measures announced on 11 March and resulting reduction in the speed and decisiveness of policy making; (2) the short- and medium-term funding challenges, set in the context of the recently agreed European Stability Mechanism (ESM), which contemplates debt restructuring as a distinct possibility; and (3) the medium-term implications of last week's revisions to the estimates for the budget deficit and outstanding government debt for fiscal consolidation.

It is very unlikely that the long term debt markets will reopen to the Portuguese government or to the Portuguese banks to any meaningful extent until the government is able to take action to dispel doubts over its commitment and ability to implement the fiscal programme. That in turn raises the probability that the government will remain reliant on its Eurozone partners for support once the EFSF expires and the ESM is introduced. While the review period is intended to allow time to assess the implications of recent announcements by the European authorities for the medium term credit environment in Europe, it seems increasingly clear that any ESM lending will first require a solvency analysis undertaken by EU officials, and if there are doubts over a government's solvency -- which could be the case if Portugal were to remain reliant on support funding for a sustained period -- private creditors would be expected to bear losses as a condition of continued support.

In that context Moody's has widened the rating differential of all of the above companies with the sovereign. The rating differentials between these GRIs and the sovereign is now three notches for Parpublica, and four notches for REFER, CP and RTP. The widening of these rating differentials primarily reflects Moody's view that it is now somewhat less likely that RoP would provide timely financial support to the GRIs (expressed as a move in Moody's support assumption from "very high" to "high" for CP, REFER and RTP), given the possible claims on RoP's increasingly stretched resources in current financial conditions. Moody's notes that the Portugal government rating is currently sustained by the agency's view that Eurozone members assistance would be forthcoming if Portugal needed funds on an expedited basis. At the same time the GRI's could become one step removed in such a case as their own access to government support could become contingent to EU decision makers.

At the same time Moody's has concluded that debt market conditions in Portugal are such that it is increasingly likely that the GRIs will require support from RoP over the short to medium term and the risk of such support being provided on a timely basis is the primary driver of this rating action. The risk that timely financial support will not be provided to all GRIs is considered higher at a time when demand for such support is more acute combine to make it somewhat less likely that support will be forthcoming on a timely basis; nonetheless such support is still highly likely to be provided. Moody's does not see a material difference in the level of support potentially available to REFER, CP and RTP, and given the weak standalone credit quality, the Moody's support assumption embedded within the rating has the highest weight in our decision. Hence, while standalone credit profiles differ slightly, final ratings are at the same level. Parpublica continues to be rated through credit substitution (ie as, in effect, an arm of government) and is rated one notch higher than the other GRIs reflecting primarily its lower short-term funding needs.

Parpublica is the government's industrial holding arm in strategic companies and therefore relies on political objectives. Its Ba1 rating is notched down from the sovereign bond rating, reflecting Moody's view that the company's ownership structure (100% state-owned) together with the very significant financial, strategic and management control exerted by the government (which, for example, appoints members of the Management Board and Audit Committee) justifies determination of the rating through credit substitution. Parpublica's greater self-sufficiency for funding justifies a marginally higher rating than that applied to the other GRIs covered by this action.

REFER's Ba2 rating reflects the following combination of inputs: (a) A BCA of 19 (Caa3 equivalent), (b) the Baa1 local currency rating of RoP, (c) Very High Dependence, and (d) High Support. REFER's BCA has been downgraded to 19 (Caa3 equivalent) from 18 (Caa2 equivalent), reflecting its worsening liquidity position and high likelihood that it will require extraordinary support from RoP in the near term to fund cash requirements. The BCA reflects Moody's view that, on a standalone basis, REFER would be very challenged to cover its financing requirements given the constraints in the debt markets and increased debt costs in Portugal. REFER has a very weak financial profile and a debt burden which is substantially more than can be supported by generated cash flow. REFER has significant funding requirements over the next 12 months to meet interest expense, its capital expenditure programme, and debt refinance requirements and very little alternate liquidity and is dependent on the continued availability of short term funding. The maturity of a Government guaranteed EUR300 million Schuldshein loan in early April 2011 is highlighted.

CP's Ba2 rating reflects the following combination of inputs: (a) A BCA of 19 (Caa3 equivalent), (b) the Baa1 local currency rating of RoP, (c) Very High Dependence, and (d) High Support. REFER's BCA has been downgraded to 19 (Caa3 equivalent) from 18 (Caa2 equivalent), reflecting its worsening liquidity position and high likelihood that it will require extraordinary support from RoP in the near term to fund cash requirements. The BCA reflects Moody's view that, on a standalone basis, CP would be very challenged to cover its financing requirements given the constraints in the debt markets and increased debt costs in Portugal. It also reflects that CP has a very weak financial profile and a debt burden which is substantially more than can be supported by generated cash flow. It is therefore dependent on the continued availability of short term funding to meet its interest costs over the next 12 months, finance its capital expenditure programme and refinance maturing debt including EUR260 million of banks loans in the third quarter 2011.

RTP's Ba2 rating reflects the following combination of inputs: (a) A BCA of 18 (Caa2 equivalent), (b) the Baa1 local currency rating of RoP, (c) Very High Dependence, and (d) High Support. RTP's BCA has been downgraded to 18 (Caa2 equivalent) from 17 (Caa1 equivalent), reflecting its worsening liquidity position as a result of a covenant breach under its senior unsecured bank facility. The covenant breach, which was due to the downgrade of the rating of the RoP, will imply a renegotiation of some terms of the loan with the lenders, primarily an increased interest rate. As part of the review process, Moody's will assess the impact on RTP's financial profile of an increased interest expense on its debt.

In line with the today's action and the ratings remaining on review for further possible downgrade, Moody's does not expect positive pressure to be exerted on the ratings of these entities in the short term.

The ratings remain on review for further possible downgrade, and the review will not be concluded until the review of the rating of the government of RoP is concluded. The trajectory of the GRIs' ratings in the future could be impacted inter alia by any future downwards moves in the rating of the government of RoP, and Moody's perception of the likelihood of extraordinary support being provided to the GRIs by RoP though the agency underlines that each of the GRIs own liquidity situation, as well as the contingency plans of each company will need to be assessed separately. Any expectation that such extraordinary support will not be forthcoming on a timely basis could cause further downwards moves in the GRI's ratings to close to their standalone credit quality.

For additional information on rating factors, please refer to the individual issuer credit opinions, available on www.moodys.com.

PREVIOUS RATING ACTION & METHODOLOGY USED

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

The principal methodologies used in this rating were Government-Related Issuers: Methodology Update published in July 2010, and Government Owned Rail Network Operators published in April 2009.

Parpublica is a state-owned industrial holding company domiciled in Lisbon, Portugal. Parpublica's main role is the management of equity stakes held by the Portuguese state in Portuguese companies of public or strategic interest in terms of restructuring of the corresponding sector. The Minister of Finance acts on behalf of the state, in its capacity as sole shareholder of Parpublica. As of March 2011, Parpublica's direct equity holdings portfolio had a book value of approximately EUR5 billion. The largest holdings are in Energias de Portugal, S.A. (EDP), GALP Energia, REN -- Redes Energeticas Nacionais, TAP airline and ANA.

Rede Ferroviária Nacional - REFER, E.P.E. is a special status corporation set up by Portuguese Decree Law to upgrade, operate and maintain substantially all of Portugal's heavy rail infrastructure. REFER is owned 100% by the Republic of Portugal and has a special legal status (Entidade Pública Empresarial, or "EPE") that defines its role as a company undertaking activities of public interest. By law, REFER may not be privatised, and Moody's does not consider likely any change of status and subsequent privatisation given the company's financial position, its role within the railway industry, and its public policy mandate.

CP, headquartered in Lisbon, Portugal, is the national railway incumbent, controlling 90% of the passenger market. CP is 100% owned by the Portuguese government though the Ministry of Finance and it has a special legal status (Entidade Pública Empresarial, or "EPE") that defines its role as a company undertaking activities of public interest. In fiscal year 2009, CP reported revenues of EUR312 million.

RTP is a corporation, duly incorporated under domestic law, and therefore subject to standard Portuguese commercial law. RTP is 100% owned by the Portuguese state through the General Directorate of Treasury and Finance, and has operated Portugal's public service broadcasting channels under a concession from the government since 1996.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

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

On our website www.moodys.com, you can find further information and any updates on the Lead Analyst to a specific Credit Rating, and the office from which the credit rating was issued.

In addition to the above general contact information please find, for each of the Credit Ratings affected, Moody's regulatory disclosures on the lead analyst and the Moody's office that has issued the Credit Rating on the ratings tab of the issuer page at www.moodys.com.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

London
Andrew Blease
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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Moody's downgrades certain Portuguese government-related issuers
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