Fitch Affirms Telefonica del Peru Ratings; Outlook Stable

Business Wire, Jan 18, 2008

MONTERREY, Mexico -- Fitch Ratings has taking the following rating actions for Telefonica del Peru S.A.A. (TDP):

- Local currency issuer default rating (IDR) affirmed at 'BBB ',

- Foreign currency IDR affirmed at 'BBB-',

- PEN754 million senior notes due 2016 affirmed at 'BBB-'.

The Outlook is Stable.

In addition Fitch's Peruvian affiliate Apoyo & Asociados has a national scale rating of 'AAA(pe)' for TDP.

TDP's ratings are supported by its solid business position as the largest Peruvian telecommunications company, 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 traffic and heightened competition. Fitch expects TDP will continue to maintain a financial profile consistent with the rating category. The ratings incorporate the acquisition of approximately 17% of Telefonica Moviles del Peru Holding S.A.A. by TDP during December of 2007. The 'BBB-' rating of the PEN754 million senior notes incorporates transfer and convertibility risks associated with the settlement of the notes, as they are issued in Peruvian nuevo soles but paid in U.S. dollars at market exchange rates. However, the notes do not add foreign exchange risk to the company's balance sheet.

The company's leading position in local service, estimated 98% market share, provides the company with a stable source of cash flow due to economies of scale, extensive network coverage and established brand name. Local service accounted for 35% of revenues for the nine months ended Sept. 30, 2007. TDP's strategy of growing its broadband, and cable television businesses, which still offers good growth prospects, should help diversify its revenues away from local regulated services and partially offset revenue declines in more mature segments. This strategy should result in relatively stable revenues and less cash flow volatility.

The ratings reflect heightened competition in the Peruvian telecom market, particularly in the local and long-distance segments. Fitch expects TDP to maintain its leading market position in the fixed line business despite increased competition. Local-service tariffs have declined due to the establishment of a productivity factor that reduces real tariffs every three months. Tariff pressures, traffic migration from fixed to mobile networks and increased competition in the corporate segment have pressured TDP's profitability over the past few years.

Regulatory and political risks are incorporated into the ratings but should tend to moderate over the next few years as the new productivity factor for the 2007-2010 period is in place and the agreement signed in December of 2006 between the Telefonica Group and the government is still recent and being executed. Fitch expects the new productivity factor will have a slight negative effect to TDP's financial performance over the next few years. On July 27, 2007, Osiptel announced the new productivity factor of 6.42% annual reduction to local service rates to be applied for the 2007-2010 period starting Sept 1, 2007. The new productivity factor will have an economic impact in the local service rates once it has reached the level of the tariff reduction set by the agreement between the Telefonica group and the government, which is expected to happen by the end of 2008.

Political risk persists in the form of the agreement reached by TDP with the Peruvian government, which had a slight negative effect to TDP's credit quality. During the first quarter of 2007, TDP reduced the monthly service charge between 12% and 29% to 1.5 million lines in service as part of the agreement reached by the Telefonica Group and the government after pressures from the latter to reduce rates further than established by the productivity factor. The agreement also reduced the rates of public telephony, which is not material to TDP's credit quality, extended the useful life of prepaid cards and the Telefonica Group made a commitment to invest over the next four years US$1 billion including the installation of 685 thousand new residential lines. Of the commitment by Telefonica to invest approximately US$1 billion over the 2007-2010 period, US$250 million will be invested by TDP for its broadband business and is expected to be funded with internally generated cash flow.

TDP's financial profile is strong and expected to remain consistent with the rating category. For the next few years, Fitch expects consolidated revenues to remain relatively stable as revenue growth from broadband services and cable television is expected to compensate for declining revenues in other business segments. For the LTM ended Sept. 30, 2007 credit protection measures remained well positioned within the rating category. Leverage measured as FFO-adjusted-leverage and total debt-to-EBITDA were 2 times (x) and 1.5x, respectively and coverage ratios of FFO-interest-coverage and EBITDA-to-interest expense were 5.1x and 6.7, respectively.