Fitch Rates Brasil Telecom's Proposed BRL1.0 Billion Senior Notes 'BBB'

MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' Foreign Currency Issuer Default Rating (IDR) to Brasil Telecom S.A. (BTM) and its proposed BRL1.0 billion Senior Unsecured Notes due 2016. The senior notes will be issued in BRL and will be payable in BRL at market exchange rates. Proceeds from the issuance are expected to be used for general corporate uses, capital expenditures and refinancing needs.

Under Fitch's view for rating entities within a corporate group structure, ratings of Tele Norte Leste Participacoes S.A. (TNE), Telemar Norte Leste S.A. (TMAR) and BTM (collectively refer to as Oi) are equalized and viewed on a consolidated basis as the linkage between subsidiaries is considered strong. These companies have operational and strategic ties and historically there have been cross defaults and debt guarantees from the parent.

Oi's ratings incorporate its strong market position, business scale, diverse service platforms, moderate regulatory risk, solid cash flow generation and a manageable debt maturity profile. Conversely, the ratings are tempered by an intense competitive environment that have resulted in modest operating results and gross leverage levels which are somewhat high when compared to its Latin-American peers. The ratings also reflect the solid progress made by Oi towards a long term target of net debt to EBITDA of 1.7 times (x) and Fitch's expectation that should remain around that level over the long term.

Fitch views the proposed corporate reorganization of TNE and its subsidiaries as positive, as it will simplify the ownership structure and will strengthen its financial profile. The resulting entity will have full ownership of the cash flows of the operating companies, including BTM, which prior to the transaction it only had 49%.

Under the corporate reorganization plan, which is expected to close by the end of November of this year, TMAR shares will be exchanged for shares of Coari Participacoes S.A. (Coari) and TMAR will become a subsidiary of Coari. At the same time, Coari and TNE will merge into BTM. Coari and TNE should cease to exist and TMAR, holder of the concession, will remain a 100% subsidiary of BTM. Telemar Participacoes S.A. is expected to remain the controlling shareholder of the resulting entity BTM, which will be renamed Oi S.A. Prior to the merger, BTM will distribute a BRL1.5 billion dividend of which BRL765 million should go to minority shareholders and the rest will go to Coari.

Robust Cash Flow Generation

On a consolidated basis, TNE presents a strong cash flow generation. On the last twelve months ended on June 30, 2011, net revenues reached BRL28.653 billion, with an EBITDA of BRL9.532 billion representing a margin of 33.3%. Cash flow from operations (CFO) of BRL7.602 billion was sufficient to meet capital expenditures of BRL4.508 billion and dividends payments of BRL634 million, with a positive free cash flow of BRL2.460 billion.

Manageable Liquidity, Net Leverage Stable:

Liquidity is underpinned by high cash balances, strong cash generation, access to credit and a manageable debt maturity profile. The ratings incorporate a net debt to EBITDA target of approximately 1.7x in the long term. Considering financial information reported under IFRS, for the twelve months ended June 30, 2011 total debt to EBITDA and net debt to EBITDA were 2.8x and 1.9x, respectively.

Total consolidated gross debt for TNE is expected to continue to gradually decline over the next few years, while net debt to EBITDA should remain close to 1.7x over the long term. As of June 30, 2011, total consolidated debt at TNE was BRL26.783 billion; composed of 52% of the debt by financial institutions, 22% by BNDES, 18% local debentures, 8% of other debt. After hedges, only 3.2% of total debt has exposure to foreign currency; similar to FX exposure by other incumbent peers in the region with indebtedness having an average cost of 90% of the CDI rate.

Key Rating Drivers:

Factors that can trigger a negative rating action include leveraged acquisitions, a substantial increase in capital expenditures or deteriorating cash flow generation that results in a material change in the company's capital structure and an expectation of a sustained increase in net leverage above 1.7x over time. A positive rating action in the near to medium term is unlikely given the past upgrade in March of 2011, however positive factors to credit quality include growing cash flow from mobile services in Sao Paulo, geographical diversification abroad Brazil and lower leverage levels sustained over time.

Fitch currently rates TNE, TMAR and BTM as follows:

TNE

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

--Foreign Currency IDR 'BBB-';

--National scale rating 'AAA(bra)'.

TMAR

--Local Currency IDR 'BBB';

--Foreign Currency IDR 'BBB';

--National scale rating 'AAA(bra)';

--US$1.75 billion senior notes due 2020 'BBB';

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

--EUR750 million senior notes due 2017 'BBB';

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

BTM

--Local Currency IDR 'BBB';

--National scale rating 'AAA(bra)';

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

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating Global Telecoms Companies' (Sept. 16, 2010);

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)'(Aug. 12, 2011);

--'National Ratings Criteria' (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Global Telecoms Companies - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.