Fitch Affirms Telmex IDR at 'A-'; Outlook Stable

MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Telefonos de Mexico, S.A.B. de C.V.'s (Telmex) foreign and local currency Issuer Default Ratings (IDRs) at 'A-'. Approximately US$2.2 billion in debt is affected by the rating action. The Rating Outlook is Stable.

Telmex's ratings reflect the company's leading position as a fixed line telecommunications provider in Mexico, strong cash flow generation and sound financial profile. The positive factors are balanced against heightened competition, traffic migration from fixed to mobile networks and increased regulatory risk.

Fitch considers the split-up of the former international operations of Telmex into Telmex Internacional S.A.B. de C.V. (Telint) in December of 2007 to have had a neutral effect on Telmex credit quality. The loss of geographical diversification and growth should be balanced against stronger free cash flow generation as the Mexican operation requires lower capital expenditures. While Telmex Mexico has posted weak operating results during the last few quarters, Fitch believes the company has strong free cash flow generation and enough financial flexibility to maintain a strong credit profile consistent with the rating category.

Telmex's integrated telecommunications business produces a significant level of cash flow from its local service business, which reduces cash flow volatility and business risk. Additionally, Telmex's leading position, economies of scale and extensive operational experience should enable the company to withstand potential competitive risks. The ratings also reflect increased migration from fixed to mobile calls and migration of dial-up internet users to ADSL resulting in weaker traffic trends. Over the past few years internet revenues have compensated for declining local service revenue.

Heightened competition from competitive local exchagnge carriers (CLECs), cable television (CATV) providers and fixed-mobile substitution has resulted in revenue declines, particularly in local service and, to a lesser extent, in interconnection revenues which in turn have pressured operating margins. Competition has increased, particularly in the high-end residential customer segment, as a consequence of the entrance of CATV providers to offer voice services. The local service business, including interconnection, continues to be the main source of revenue and cash flow, accounting for approximately 56% of consolidated revenues for the twelve months ended Sept. 30, 2008. The introduction of number portability in July of 2008 should further add competition for local service. So far the net effect due to number portability for Telmex has been limited, loosing 11,400 LIS out of the 17.8 million lines in service (LIS) base. Telmex strategy has focused in offering bundled services to different customer segments in order to gain loyalty as competition increases. In the residential segment, the company still awaits the authorization to offer video services which should even its bundle offering with cable TV providers as they are already offering voice service.

Regulatory and legal risks have increased over the past 12 months. The antitrust authority COFECO has determined that Telmex has substantial influence in origination of calls, local transport, dedicated circuits and call termination. The investigation of the above determinations may result in COFECO considering that Telmex has dominance in the above markets. This could result in the addition of certain new obligations to Telmex in terms of rates, quality of services or fines. While the company is in process of responding to these determinations by COFECO, the final outcome is still uncertain and may extend for a while until it ends.

Telmex's financial profile is consistent with the rating category. Considering annual EBITDA generation of approximate US$5.3 billion, dividend payment of US$720 million, interest expense of US$564 million and capital expenditures of up to US$900 million, Telmex should generate approximately US$3.1 billion in free cash flow before considering share repurchases. This free cash flow give the company ample flexibility to balance its capital structure to levels consistent with the rating category even with weak operating results. EBITDA margins have recently trended downward to 46.2% for the quarter ended Sept. 30, 2008 and are expected to slightly decline over the next few years. The ratings incorporate Fitch's expectation that Telmex's credit profile and credit protection measures should remain stable over the medium term. For the last twelve months ended Sept. 30, 2008, total debt-to- EBITDA and net debt-to-EBITDA ratios were 1.7 times (x) and 1.4x, respectively. Coverage ratio of EBITDA-to-gross interest expense 8.5x for the nine months ended Sept. 30, 2008.

Telmex's has a good liquidity position with a comfortable debt maturity profile. Excluding the US$1 billion maturity taking place Nov. 19, 2008, total maturities for the next three years amount to US$4.2 billion versus estimated annual free cash flow before share buybacks of over US$3.5 billion and ample access to financing from banks and capital markets. The US$1 billion senior unsecured notes maturing Nov. 19, 2008 was paid with cash on hand, cash flow generation and credit facilities accessed during the year. In addition to those facilities and the strong cash generation, Telmex has uncommitted facilities in the range MXN4 billion to MXN5 billion. As of Sept. 30, 2008 total debt amounted to approximately US$9 billion composed of US$4.7 billion of bank facilities, US$1.1 billion in local 'Certificados Bursatiles' issuances and US$3.2 billion in international bonds.

Telmex is the largest telecommunications provider in Mexico and operates the most complete local and long distance telecommunications networks in Mexico. Telmex offers local and public telephony, domestic and international long-distance, interconnection services to other operators, data and Internet services. For the 12 months ended Sept. 30, 2008, the company had 17.8 million lines in service and pro forma the split-up, it had revenues and EBITDA of MXN125 billion and MXN58 billion, respectively. Telmex is indirectly controlled by Carlos Slim and his family via Carso Global Telecom, which controls approximately 71% of the voting shares and 57% of the economic stake of Telmex.

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.