Fitch Ratings Dwngrs Manquehue Net S.A. To 'CCC+'; Outlook Neg.

Business Editors

CHICAGO--(BUSINESS WIRE)--Aug. 16, 2002

Fitch Ratings has downgraded the foreign currency and the international scale local currency ratings of Manquehue Net S.A. (Manquehue) to 'CCC+' Rating Outlook Negative from 'B+' Rating Outlook Negative.

The rating action reflect the company's continued weak financial performance, debt restructuring uncertainties and uncertain shareholder commitments as the company is up for sale. Credit protection measures have declined as Manquehue increased debt by more than US$55 million to fund its network buildout without achieving the anticipated revenue growth. At 3M'02, EBITDA/gross interest and debt/EBITDA was 1.6 times (x) and 7.4x, respectively. Meanwhile, EBITDA/gross interest and debt/EBITDA was 2.3x and 4.4x, respectively at 3M'01. Manquehue would violate a syndicated loan covenant if debt/EBITDA exceeded 8.0x. The execution risk of the company's strategy is quite uncertain. Absent a material improvement in 2002 financial performance, the ratings will remain under pressure.

The company's financial performance has been impacted by strong competition. Manquehue faces significant competition from the incumbent operator, Compania de Telecomunicaciones de Chile S.A., which controls approximately 77% of the local exchange sector and is a leading long distance and broadband service provider. In addition, Manquehue's financial performance has been impacted by slower than anticipated growth in demand and revenues, which are partially due to macroeconomic conditions.

Positively, Manquehue has extended a US$2 million equivalent amortization due November 2002 until September 2004, restructured roughly US$15 million of vendor financing and is in the process of restructuring a US$30 million equivalent loan with Chilean financial institutions. In addition, shareholders plan to enhance liquidity with a ChP2 billion peso (approximately US$3 million) subordinated loan by August 30, 2002, pending the conclusion of the US$30 million equivalent loan restructuring.

Manquehue is not expected to receive substantial support from its international shareholders. One of its shareholders, Williams Communications, is bankrupt and is unlikely to provide any shareholder support going forward. In addition, National Grid, the largest shareholder has announced its intent to exit the Latin American telecommunications sector. The current shareholder structure is as follows: MetroGas S.A. (25.6%), Williams Communications (16.4%), Rabat Family (21.2%), Xycom (6.8%), and National Grid (30%).

At March 31, 2002, Manquehue had approximately US$9.9 million equivalent of short-term debt. The extension of the November 2002 amortization and the proposed shareholder loan (if proceeds were allocated to maturities) would result in roughly US$4.9 million equivalent of short-term debt through March 2003. No significant increase in debt is expected during 2002. Going forward, EBITDA should remain positive and EBITDA/gross interest should remain over 1x. Meanwhile, debt/EBITDA for 2002 may exceed 8.0x.

Manquehue benefits from its presence in selectively targeted upper income residential markets and its growing presence as a broadband communications provider to the corporate sector. Manquehue has competitive interconnection rates, which are regulated by Chilean regulator, Subtel. Recent regulatory rulings have been designed to increase competition and lower interconnection rates, which has somewhat benefited Manquehue. The company is not subject to dominant carrier rules. Pricing for local exchange service has roughly maintained parity with competitors, but Manquehue benefits by its ability to provide value added bundled services (e.g., third party cable, high-speed Internet access, and voice telephony) to residential customers.

Manquehue has over 400km of fiber in and around Santiago and an extensive underground duct system. The duct system, which essentially acts as a conduit, provides the company significant cost savings by allowing for rapid fiber deployment when demand materializes while avoiding the need to obtain rights of way and incurring the associated excavating and resurfacing costs.

The company also has a 30.1% stake in the trans-Andean long-haul operator, Silica Networks. Williams Communications and National Grid directly, and indirectly through Manquehue, have a 24.85% and 59% ownership stake in Silica Networks, respectively. Manquehue expects no meaningful contribution to financials from Silica Networks in the near term as the long-haul sector has experienced price erosion. Consequently, the shareholders of Silica Networks are expected to monetize their investment in the near term. Manquehue provides local exchange service in and around Santiago, Chile. Manquehue has approximately 95,000 lines in service or 2.6% of the Chilean market. Through its affiliate, 122 Manquehue Net, the company provides international and national long distance service. Manquehue also provides Internet, cable TV, and public telephony services.