Fitch: Telecom Bill Heightens Risk for Telefonica del Peru

Business Wire, Sept 21, 2006

MONTERREY, Mexico -- Telefonica del Peru S.A.A. (TDP) is facing heighten uncertainty and risk following the approval of a bill by the Peruvian congress to eliminate fixed monthly tariffs charged by telecommunication service providers, according to Fitch Ratings.

The bill still needs to be signed by Peru's new president Alan Garcia, to become law, which remains unclear at this time. The bill has also caused a debate on whether the bill contradicts the terms of the original concession agreement between TDP and the government, and the associated possible negative impact on foreign direct investment (FDI). Former and current members of the Peruvian Telecommunications Regulatory Board (Osiptel) have publicly stated that the concept of fixed monthly tariffs is included in the contract signed in 1994 between TDP and Peruvian government. This contract has the status of contract-law, and as such may not be modified by the state through subsequent legislation or regulation, except in very specific cases related to compliance with international laws.

Signing the bill into law may have serious negative financial implications for TDP assuming no financial offset or monetary compensation was received. Monthly service charges accounted for approximately 24% of TDP's 2005 consolidated revenues or more than US$250 million. In and of itself, loss of this revenue stream would reduce operating cash flow by approximately 45% assuming no offset or cost reduction plans. Fitch will monitor the situation and evaluate any implications it may have in TDP's financial profile pending the final outcome.

Fitch currently rates TDP as follows:

TDP

--Foreign currency Issuer Default Rating (IDR) 'BBB-';

--Local currency Issuer Default Rating (IDR) 'BBB ';

--PEN754.1 million senior notes due 2016 'BBB-';

--Rating Outlook Stable.

TDP's Grantor Trust

--International scale rating 'BBB'.

TDP's Grantor Trust a securitization of international settlement rates receivables and Fitch's Peruvian affiliate Apoyo & Asociados has a national rating of 'AAA(pe)' for TDP.

TDP is the leading telecommunications provider in Peru with 2005 revenues and EBITDA of US$1.1 billion and US$572 million, respectively. The company participates in several segments, including fixed local services (36% of 2005 revenues), public and rural phone services (17%), long distance (12%), internet (11%) cable television (10%), business communications (2%) and other services (12%). As of June 30, 2006, the company had approximately 2,434 thousand lines in service, 389,119 broadband lines and 490,442 cable television subscribers. TDP is 97% owned by Spain's Telefonica S.A.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.