Fitch Ratings Affirms Telemar.

CHICAGO -- Fitch Ratings has affirmed the following ratings for Tele Norte Leste Participacoes S.A. (TNE) and Telemar Norte Leste S.A. (TMAR):

TNE

-- International scale local currency debt rating 'BB+';

-- International scale foreign currency debt rating 'BB-';

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

TMAR

-- International scale local currency debt rating 'BBB-';

-- International scale foreign currency debt rating 'BB-';

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

All ratings have a Stable Rating Outlook.

The rating affirmation reflects the ability of Telemar, the collective name of TNE and TMAR, to reinforce its business position and financial profile over the past year. Telemar continues to hold a leading market position in local service (more than 95% market share) and long distance in region I. In addition, the company is the second largest wireless operator in its region two years after its introduction. Local service remains the backbone of the Telemar's credit quality. The company derives a significant portion of revenues from its relatively stable local service operations, which reduces cash flow volatility and business risk. Telemar is likely to maintain its leading market share position in region I, given the capital-intensive barriers facing new entrants.

Local service accounted for approximately 53% of revenues during the first nine months of 2004 and generates significant free cash flow due to relatively low capital expenditure needs. Telemar had 15.2 million lines in service at September 2004, which implies penetration rates of 16%. The number of lines in service has remained stable over the past two years, suggesting it is reaching maturity. Additional growth in lines in service has been limited by per capita income levels and by increasing competition from wireless services.

Telemar's primary growth opportunities are in newer services such as wireless and Internet. During 2002, Telemar introduced wireless services in region I through its subsidiary Oi. Since then, Oi has been able to significantly grow the number of clients to seven million subscribers by January 2005 and has reached a market share of over 20% in region I. Oi's share of net additions in its region has been over 30%. The cash flow contribution from these operations is modest because wireless revenues account for only around 10% of total revenues and still require significant capital expenditures to meet subscriber growth.

The ratings also incorporate the competitive nature of the industry and ongoing regulatory risk faced by Telemar. In particular, the wireless sector is very competitive due to the high number of established wireless operators. Ongoing regulatory risk is illustrated by a legal injunction in 2003 that temporarily prevented Telemar from increasing local-service tariffs according to original concession agreement terms. During 2004, the courts reversed the earlier tariff challenges and Telemar was able to increase tariffs to reflect the original terms. Heightened regulatory risk will remain present for Telemar and the other Brazilian fixed line incumbents, particularly until the new concession agreement terms for the 2006-2025 period are finalized and implemented.

Telemar has a solid credit profile, with cash balances of BRL4.9 billion, strong EBITDA generation, and a manageable debt amortization schedule. The company had interest coverage as measured by EBITDA to interest expense of 8.3 times (x) during the first nine months of 2004, leverage as measured by total debt to EBITDA of 1.7x, and net debt to EBITDA of 0.9x at Sept. 30, 2004.

The company has gradually reduced total debt, net of hedging effects, to BRL10.9 billion at Sept. 30, 2004 from BRL12.2 billion at Dec. 31, 2002 with free cash flow. Approximately 70% of debt is denominated in foreign currencies, with the remainder denominated in reais. Telemar's strategy is to attempt to hedge most of its foreign currency-denominated debt. Capital expenditures of approximately BRL2.0 billion during 2004, are manageable when compared with estimated annual EBITDA of BRL6.5 billion. Capital expenditures for 2005 are expected to reach BRL2.0 billion-2.5 billion and should continue to be financed internally.

Telemar provides telecommunications services in region I, which comprises 16 states and includes Rio de Janeiro. Telemar also provides Internet, data transmission, and long-distance services. TNE is majority controlled by Telemar Participacoes S.A., which is in turn controlled by a group of Brazilian investors.