Fitch Affirms Telefonica del Peru (TDP) Ratings.

MONTERREY, Mexico -- Fitch has affirmed Telefonica del Peru S.A.A. (TDP) foreign currency Issuer Default Rating (IDR) at 'BBB-', local currency IDR at 'BBB+', and PEN754 million senior notes due 2016 at 'BBB-'. The Rating Outlook is Stable. Fitch's Peruvian affiliate Apoyo & Asociados has a national rating of 'AAA(pe)' for TDP.

The rating action reflects TDP's recent agreement with the government to reduce certain charges and/or rates, the commitment of the Telefonica Group, including TDP, to invest approximately US$1 billion over the next four years of which US$500 million will be invested by TDP. Also, the ratings are supported by the company's solid business position as the largest Peruvian telecommunications company, the diversified revenue stream from its various business segments, healthy cash flow generation, relatively low capital-expenditure needs and a strong financial profile. The ratings incorporate regulatory risks, continued pressure on local service traffic and heightened competition.

Fitch views the agreement reached by TDP with the Peruvian government to have a slightly negative effect in TDP's credit quality over the short term but should have a neutral effect over the medium term. Credit protection measures should remain consistent in the rating category. TDP agreed to reduce the monthly service charge between 12% and 29% depending on the subscription plan to approximately 1.5 million users. These declines should take place during the first quarter of 2007. The agreement also reduced the rates of public telephony, which should not have a material effect on TDP's credit quality, extended the useful life of prepaid cards and the Telefonica Group made a commitment to invest over the next four years US$1 billion including the installation of 685 thousand new residential lines. Fitch anticipates that TDP will invest US$500 million divided into US$250 million to increase broadband penetration and US$250 million in fixed telephony and cable television services. Fitch expects that TDP's US$500 million investment related to this obligation of the Telefonica Group will be financed with internally generated cash flow.

TDP's local-service business, which accounted for approximately 37% of revenues for the nine months ended Sept. 30, 2006, provides the company with a relatively stable source of cash flow. TDP currently has an estimated 96% market share in the local-service business. Going forward, the company should maintain a leading market position in each segment in which it participates due to its economies of scale, extensive network coverage and established brand name. The company also benefits from a diversified revenue stream that helps reduce cash flow volatility. Growth in the cable television and broadband and data segments should continue to partially offset revenue declines in more mature segments. The broadband segment holds significant future growth opportunities due to the low penetration of these services. For the next few years, Fitch expects consolidated revenues to remain relatively stable as revenue growth from broadband services and, to a lesser extent, cable television is expected to compensate for declining revenues in other business segments such as local, public telephony and long distance.

The ratings incorporate regulatory risk and heightened competition in the Peruvian telecom market that have driven rates downward, particularly in the local and long-distance segments. Local-service tariffs have declined due to the establishment of a productivity factor that reduces real tariffs every three months. Tariff pressures, traffic migration from fixed to mobile networks and increased competition in the corporate segment have pressured TDP's profitability, with revenues and EBITDA declining approximately 3% in local currency per year over the past four years.

TDP's financial profile is strong and expected to remain consistent with the rating category. For the first nine months of 2006, credit protection measures remained strong in the category with ratios of total debt-to-EBITDA of 1.3 times (x) and EBITDA-to-interest expense of 10.9x. Strong free cash flow generation provides the company with financial flexibility. Despite an expected moderate increase in leverage in the short term to 1.4x-1.5x, the company's financial profile should remain strong. Debt refinancing risk is low due to TDP's maturity profile and annual free cash flow generation of more than PEN1 billion combined with access to capital markets.

TDP is the leading telecommunications provider in Peru with 2005 revenues and EBITDA of US$1.1 billion and US$572 million, respectively. The company participates in several segments, including fixed local services (36% of 2005 revenues), public and rural phone services (17%), long distance (12%), Internet (11%), cable television (10%), business communications (2%) and other services (12%). As of Sept. 30, 2006, the company had approximately 2.5 million lines in service, 435,000 broadband lines and 508,000 cable television subscribers. TDP is 98% owned by Spain's Telefonica S.A.

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.