Fitch Rates Telefonica del Peru's US$200MM Proposed Senior Notes 'BB'

Business Wire, Sept 20, 2005

MONTERREY, Mexico -- Fitch Ratings has affirmed Telefonica del Peru S.A.A.'s (TDP) international scale local currency unsecured debt rating at 'BBB ' and foreign currency unsecured debt rating at 'BB', and has assigned a 'BB' rating to its proposed US$200 million senior unsecured notes to be issued in PEN currency and paid in USD currency. The Rating Outlook is Stable.

Fitch also maintains an international scale rating of 'BBB' for TDP's Grantor Trust, a securitization of international settlement rates receivables. Fitch's Peruvian affiliate Apoyo & Asociados has a national rating of 'AAA(pe)' for TDP. Use of proceeds for the proposed notes is expected to be for general corporate purposes, including working capital and capital expenditures.

The ratings reflect TDP's solid business position as the largest Peruvian telecommunications company, the diversified revenue stream from its various business segments, healthy cash flow generation, relatively low capital expenditure needs and a strong financial profile. The ratings incorporate regulatory risks, continued pressure on local service tariffs, heightened competition, as well as moderately higher financial leverage following the completion of the debt offering and over the medium term. Fitch expects that TDP will continue to maintain a financial profile consistent with the rating category. The 'BB' rating of the proposed notes incorporates transfer and convertibility risks associated to the settlement of the notes, as they will be issued in PEN but paid in USD at market exchange rates; however, the new issuance will not add foreign exchange risk to the company's financial risk profile.

TDP's local-service business, which accounts for about 37% of consolidated revenues as of June 30, 2005, provides the company with a relatively stable source of cash flow. TDP currently has a 97% market share in the local service business. Going forward, the company should maintain a leading market position due to its economies of scale, extensive network and established brand name. TDP also benefits from a diversified revenue stream that helps reduce cash flow volatility. Over the past year and despite the appreciation of the local currency, growth in the cable television and broadband segments partially offset revenue declines in more mature segments such as local service, long distance and public telephony. The broadband segment holds significant future growth opportunities due to the low penetration of these services. For the next few years, consolidated revenues are expected to remain relatively stable as revenue growth from broadband services, and to a lesser extent cable television, are expected to fully compensate for declining revenues in other business segments such as local, public telephony and long distance.

The ratings incorporate regulatory risk and heightened competition in the Peruvian telecom market that have driven rates downward, particularly in the local and long distance segments. Local-service tariffs have declined due to the establishment in September 2001 of a productivity factor that reduced real tariffs every three months by an annual rate of 6%. The productivity factor is revised and adjusted every three years. The new productivity factors, which became effective September 2004, further reduce tariffs by an annual rate of 10.07% less inflation for connection fees, monthly fees, and local measured service, and 7.8% less inflation for long distance. Tariff pressures and increased competition have pressured TDP's profitability, with revenues and EBITDA declining both on average by 4% in local currency per year over the past three years. However, EBITDA for first-half 2005 has increased 10.5% due to the cost and expense controls implemented by the company.

The company, as in the past few years, may be able to partially offset the impact of the new tariffs if it can successfully grow its other businesses and reduce its cost structure. Notwithstanding the potential impact of the local service tariffs, TDP's financial profile is expected to remain consistent with the rating category considering an expected annual free cash flow generation before capex of around US$400 million, which provides the company with financial flexibility for a potential leverage increase over levels of June 30, 2005 of debt/EBITDA of around 1.1x.

TDP's credit metrics are expected to remain consistent with the rating category. Despite an expected moderate increase in leverage, the company's financial profile should remain strong. Debt refinancing risk is low due to TDP's annual EBITDA generation of US$550-$600 million combined with access to capital markets financing. TDP has put in place an authorized capital reduction program up to PEN$1.3 billion, of which PEN$775 million has been used. The rating incorporates the possibility that additional capital reductions may occur under the outstanding program.

TDP is the leading telecommunications provider in Peru through its leading shares of the fixed local and long-distance sectors, as well as public telephone, Internet, broadband services, company communications, and cable television services with revenues and EBITDA of US$1.1 billion and US$561 million, respectively, during 2004. The company participates in several segments, including fixed local services (43% of 2004 revenues), public and rural phone services (20%), cable television (10%), broadband and business communications (9%), and long distance (9%). For year-end 2004, the company had approximately 2.1 million lines in service, 129 thousand public phones, 389 thousand cable television subscribers, and 205 thousand broadband customers. The company is 98% owned by Telefonica S.A of Spain (TEF), which controls various fixed line and wireless operations throughout Latin America.