Fitch Rates Telemar's Up to US$750MM Proposed Notes 'BBB-'

MONTERREY, Mexico & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Telemar Norte Leste S.A.'s (TMAR) proposed issuance of up to US$750 million senior unsecured notes due 2020. Proceeds from the issuance are expected to be used for refinancing needs, improving the debt maturity profile, and general corporate uses. In addition, TMAR may offer a voluntary exchange of its 2019 senior notes for the new 2020 notes.

Fitch rates Tele Norte Leste Participacoes S.A. (TNE), parent company of TMAR, and its subsidiaries, collectively referred to as Oi as follows:

TNE

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

--Foreign Currency IDR 'BBB-';

--National scale rating 'AA+(bra)'.

TMAR

--Local Currency IDR 'BBB-';

--Foreign Currency IDR 'BBB-';

--National scale rating 'AA+(bra)';

--US$750 million senior notes due 2019 'BBB-';

--BRL2.6 billion fourth debenture issuance maturing 2011 & 2012 'AA+(bra)';

--BRL2.25 billion fifth debenture issuance maturing 2015 & 2020 'AA+(bra)'.

Brasil Telecom S.A. (BTM)

--Local Currency IDR 'BBB-';

--National scale rating 'AA+(bra)';

--BRL1.08 billion fifth debenture issuance due 2013 'AA+(bra)'.

The Rating Outlook is Positive.

Oi's ratings and Positive Outlook reflect Fitch's view of the company's stronger competitive position after the acquisition of BTM, diverse service offering, solid cash flow generation and the expectation that as a result of this, the company should approach its net debt to EBITDA target of 1.7 times (x) by the end of 2012. The agreement with Portugal Telecom and the capital increases at TNE and TMAR should help Oi reach the net leverage target more rapidly. Solid progress by the company towards this target may lead to a one-notch upgrade, providing there are no material changes to the company's business and financial risk profile.

Oi's ratings incorporate its strong market position, business scale, diverse service platforms, moderate regulatory risk and access to credit and capital markets. Conversely, the ratings are tempered by gross leverage levels which are somewhat high for the rating category and strong competitive environment. Under Fitch's approach to rating entities within a corporate group structure, ratings of TNE, TMAR and BTM are equalized and viewed on a consolidated basis as the linkage between subsidiaries is strong. In addition to operational and strategic ties, there are cross defaults and debt guarantees from the parent.

PORTUGAL TELECOM AGREEMENT, CAPITAL INCREASE POSITIVE:

Fitch views the agreement with Portugal Telecom should give Oi some synergies, mainly related with bargaining power with suppliers, in addition to a 10% stake in Portugal Telecom. Furthermore, the capital increases in Telemar Paricipacoes S.A. (TMARPART), TNE and TMAR will result in an improved liquidity position and should better position Oi for future expansion. Oi may raise up to BRL12 billion in capital and is expected to pay around BRL1.75 billion to BRL2 billion for up to a 10% stake in Portugal Telecom. Proceeds from this capital increase should also be used by TMAR to improve its cash position, reduce debt levels and put it on a better position to fund its growth strategy over the next few years.

Portugal Telecom and Oi announced that they have reached an agreement where Portugal Telecom will acquire directly and indirectly 22.4% of Oi for approximately BRL8.4 billion. The transaction includes Portugal Telecom acquiring a 35% stake in AG Telecom and L.F. Tel which each owns 19.33% of TMARPART, the controlling entity of TNE which controls TMAR. Together with this transaction, Portugal Telecom will get a 10% stake in TMARPART.

Growth for the next few years, in revenues and cash flow, should be driven by data and mobile services including mobile operations in Sao Paulo. While the main cash flow generator will continue to be the local service segment, Oi continues to face challenges in fixed local services as mobile and broadband substitution continues to gain presence in local traffic. Fitch believes Oi's competitive position has strengthened especially in the mobile and corporate services as a result of the integration with BTM. Domestic corporate service offerings benefit from the combination of BTM and Oi's networks, which created a country-wide backbone. Mobile services ought to benefit from a nationwide network and the potential for an increased market share in the mobile segment, particularly in region II.

MANAGEABLE LIQUIDITY, LEVERAGE EXPECTED TO DECLINE:

Liquidity is underpinned by high cash balances, strong cash generation, access to credit and a manageable debt maturity profile. The company is expected to refinance upcoming maturities in the next few years while gradually reducing debt. The target of net debt to EBITDA of approximately 1.7 times (x) by the end of 2012 still compares well for the rating category within Latin American peers. For the 12 months ended June 30, 2010 total debt to EBITDA and net debt to EBITDA were 3.2x and 2.0x, respectively.

Total consolidated gross debt for TNE is expected to finish 2010 in the range of BRL28 billion to BRL29 billion and continue declining in the next few years. As of June 30, 2010, total consolidated debt at TNE was BRL32.355 billion; composed of 53% of the debt by financial institutions, 25.4% local debentures, 20% BNDES debt, 1.6% of other debt. After hedges, only 4% of total debt has exposure to foreign currency; similar to FX exposure by other incumbent peers in the region. Of total debt, BRL4.201 billion is allocated at BTM, BRL26.297 billion at TMAR and BRL1.857 billion at TNE with an average cost of 110% of the CDI rate.

Additional information is available 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 16, 2010;

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', July 14, 2010;

--'National Ratings - Methodology Update', Dec. 18, 2006.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Parent and Subsidiary Rating Linkage Criteria Report

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826

National Ratings - Methodology Update

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=305544

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