Fitch Affirms Telefonica Chile's IDR at 'BBB+'; Upgrades National Scale to 'AA(cl)'; Outlook Stable

MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions for Telefonica Chile S.A. (former Compania de Telecomunicaciones de Chile S.A.):

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

-Foreign Currency IDR affirmed at 'BBB+';

-National scale IDR upgraded to 'AA(cl)' from 'AA-(cl)';

-National scale short-term IDR affirmed at 'F1+(cl)', including commercial paper lines 005 and 015;

-Local bonds series L, F, N and M upgraded to 'AA(cl)' from 'AA-(cl)'.

The Rating Outlook is Stable.

The affirmation of the international scale and the upgrade of the long-term domestic scale and local bonds considers Telefonica S.A.'s (rated 'A-' by Fitch) increased ownership stake of 97.89% from 44.9% during the last year, lower exposure to regulatory risks and the expectation of a stable credit profile over the medium term. Fitch views a majority ownership by Telefonica benefits Telefonica Chile in the form of operating efficiencies related to economies of scale and cost and administrative efficiencies between Telefonica Chile, Telefonica Moviles Chile S.A. (Movistar; rated 'AA(cl)'), and its parent in Spain. In the past, some of these efficiencies such as brand integration across fixed and mobile segments were not materialized due to different ownership structures between the fixed and the mobile unit. The rating actions also incorporate lower risks related to regulated tariff services as less than 8% of revenues are derived from regulated services, favorably compared with 50% and 19% five years ago and a year ago, respectively. Fitch believes that despite a lower mix of regulated revenues over consolidated revenues, the company continues to face competitive challenges, especially in traditional voice services.

Telefonica Chile's ratings are supported by its leading position in the Chilean market, strong free cash flow generation and solid financial profile. The ratings reflect increased competition, lower regulatory risk, weaknesses in local traffic and the policy of returning cash to shareholders via dividends or capital reductions.

The strategy of introducing broadband and pay television services to customers as a bundle offering has mitigated declines in lines in service (LIS) and has helped increased loyalty with its customers. In addition, increases in broadband and pay television services have compensated pressures in traditional voice services due to increased competition and traffic migration to mobile networks. It is expected that these services, offered in bundle packages, should help maintain relatively stable the cash flow generation and the LIS over the next few years as local traffic from fixed lines continue to decline. The reduction in calling party pays (CPP) tariffs during 2009 did not affect the company's cash flow generation despite registering lower revenues. CPP revenues are passed through to mobile operators without Telefonica Chile having to keep any benefit, only uncollectables risk.

Fitch believes the regulatory environment for Telefonica Chile has improved over the past few years. In January 2009 the antitrust authority liberalized fixed and variable charges for local services and public telephony. In addition, the new tariff decree for the 2009-2014 period, which will become effective retroactively to May 2009 once administrative procedures are concluded, will continue to regulate the interconnection and local access. The decree also sets a wholesaler unbundling broadband service, a rule for senders keep all and introduction for number portability for fixed and mobile services by 2011. Fitch expects Telefonica Chile to have a negative balance on ported LIS once number portability is implemented, however, the current strategy of reducing churn levels and increasing customer satisfaction and loyalty by, among other things, bundling different services should temper this effect.

During the end of 2008, Telefonica S.A. successfully completed a tender offer to increase its ownership in Telefonica Chile to 97.89% from 44.9%. The transaction is consistent with the strategy of Telefonica in Latin America in terms of ownership. The company's strong brand equity, leading position and operational experience should allow it to maintain a strong free cash flow generation and a stable financial profile, with relatively stable debt levels, despite competitive challenges.

The ratings incorporate expectation that over the long-term total debt should remain stable, close to CLP435 billion, and total debt to EBITDA ratio at or below 2.0 times (x). Future reduction in leverage should be driven by increased EBITDA and FFO. For the nine months ended Sept. 30, 2009, FFO adjusted leverage was 1.9x and total debt to EBITDA was 2.0x. Coverage ratios of FFO interest coverage and EBITDA to gross interest were 21.7x and 19.9x, benefiting from lower interest rates.

Fitch expects Telefonica Chile to close 2009 with approximately CLP430 million in debt after the company pays approximately CLP70 billion before year-end. Total indebtedness, including hedges, as of Sept. 30, 2009 was CLP499 billion composed of a CLP230 billion of syndicated loans, CLP200 billion in local bonds and CLP69 billion in other bank loans. All the debt is denominated in local currency after hedges and only 14% is exposed to inflation through unidades de fomento (UF) notes and 53% has a floating interest rate. Fitch expects that as interest rates increase, the company should continue to increase the proportion of debt with fixed rates by using hedges.

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

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