Fitch Affirms Telefonica de Argentina Following Capital Reduction Announcement.

MONTERREY, Mexico & BUENOS AIRES, Argentina -- Fitch affirms Telefonica de Argentina S.A.(TASA) after the announcement to reduce its capital by approximately ARP1.048 billion, as follows:

E[acute accent]-- Foreign currency Issuer Default Rating (IDR) 'B+';

E[acute accent]-- Local currency IDR 'BB-';

E[acute accent]-- National scale rating 'A+(arg)'.

E[acute accent]The Ratings Outlook is Stable. On August 2, 2006 Fitch upgraded TASA's foreign currency IDR to 'B+' from 'B' as a consequence of the August 1st upgrades of the Argentine Republic long-term local currency IDR to 'B' from 'B-'and the Country Ceiling to 'B+' from 'B'. E[acute accent]Telefonica de Argentina credit quality and credit metrics continues to be consistent with the rating category considering the proposed equity reduction. The ARP1.048 billion capital reduction is expected to be a one time event as part of its strategy to rearrange its capital structure. This reduction should be financed mainly with cash balances, plus additional short-term debt in the range of approximately ARP250-300 million. The additional debt would slightly increase the company's leverage, returning to current levels over the short term as a result of the company's solid cash generation. E[acute accent]TASA ratings are supported by its improved financial profile, strong business position in the Argentine telecom sector with an estimated fixed-line local-service market share of 53.5%, solid peso-denominated cash flow generation and a manageable debt maturity profile. The ratings also incorporate a level of implicit support from controlling shareholder Telefonica S.A. of Spain, which has provided flexibility in the form of intercompany loans. The ratings also reflect a continuing exposure to foreign currency fluctuations, because most of TASA's revenues are peso denominated while its debt is largely foreign currency denominated. In addition, the company faces regulatory risk and increased competition from wireless services. E[acute accent]The company has reduced its debt levels over the past few years with internally generated cash flow to ARP2.7 billion as of March 31, 2006 from a peak of over ARP6 billion in 2002. For the last twelve months ended March 31, 2006, credit protection measures of total debt to EBITDA and EBITDA to interest expense were 1.5 times(x) and 5.9x, respectively. Considering a maximum additional indebtedness of ARP250-300 million for the equity reduction, proforma total debt to EBITDA may increase to 1.7x, which is consistent with the rating category. E[acute accent]TASA is the incumbent local exchange carrier in the southern region of Argentina providing local service, long distance, broadband services and dial up Internet access with revenues and EBITDA during 2005 of approximately USD$1.149 billion and USD$592 million, respectively. Telefonica S.A. of Spain controls, either directly or indirectly, 98% of TASA. E[acute accent]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.