Fitch Upgrades Telefonica de Argentina to 'AA-(arg)'; Affirms International Scale Ratings.

MONTERREY, Mexico & BUENOS AIRES, Argentina -- Fitch Ratings has taken the following rating actions for Telefonica de Argentina S.A. (TASA) and Telefonica Holding de Argentina S.A. (THA). All ratings have a Stable Outlook:

TASA

--International scale local currency Issuer Default Rating (IDR) affirmed at 'BB-';

--International scale foreign currency IDR affirmed at 'B+';

--Senior unsecured affirmed at 'B+/RR3';

--National scale rating upgraded to 'AA-(arg)' from 'A+(arg)'.

THA

--International scale local currency IDR affirmed at 'B+';

--International scale foreign currency IDR affirmed at 'B+';

--Senior unsecured affirmed at 'B+/RR4';

--National scale rating upgraded to 'A+(arg)' from 'A(arg)'.

TASA's 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 incorporate a level of implicit support from controlling shareholder Telefonica S.A. of Spain, which has provided flexibility in the form of intercompany loans, a continuing exposure to foreign currency fluctuations, and the recently announced ARP1.048 billion capital reduction. Most of TASA's revenues are peso denominated while most of its debt is foreign currency denominated. In addition, the company faces regulatory risk and increased competition from wireless services.

THA's ratings are largely dependent on the credit quality of TASA since THA ultimately relies on cash flow generated by TASA to service their debt obligations through management fees. Telefonica Holding's unconsolidated debt amounted to US$16.5 million as of June 30, 2006; US$9.1 million of debt with Telefonica Internacional S.A. (TISA) and US$7.4 million in outstanding rated public notes. Until 2001, Telefonica Holding's main source of income was dividends received from Cointel. Because Cointel has not paid dividends since 2001, Telefonica Holding's current source of cash flow is management fees indirectly received from TASA, which totaled US$12 million during 2005 and should be sufficient to meet its financial obligations.

TASA faces significant regulatory risk and its profitability has been pressured because fixed-line operators are not allowed to increase local service tariffs. Although local service tariffs remain frozen, the company has sufficient resources to meet its debt obligations and capital expenditures due to its solid annual cash flow generation in excess of US$500 million over the last three years. Going forward, TASA's interest expenses are manageable in the range of US$80 million-US$90 million per year. Capital expenditures for the next few years are expected to be moderate at approximately US$175 million and should be financed with internally generated cash flow.

TASA's financial profile should continue to improve in the medium term, despite the temporary increase in debt associated with the capital reduction, as the company continues to use free cash flow to pay debt. The company has reduced its debt levels over the past few years with internally generated cash flow to US$718 million as of June 30, 2006 from a peak of over US$1.8 billion in 2002. For the last 12 months ended June 30, 2006, credit protection measures of total debt to EBITDA and EBITDA to interest expense were 1.4 times (x) and 5.7x, respectively.

On Aug. 9, 2006 Fitch affirmed TASA's ratings after the announcement of an ARP1,048 million capital reduction that will be financed with cash balances and additional debt of maximum ARP350 million. The additional debt should be paid within the next 6-12 months. Fitch views TASA's capital reduction as neutral to its credit quality and mildly positive for THA's credit quality, given the fact that Cointel may reduce debt levels with the proceeds from the capital reduction or at least improve its liquidity position, maintaining the cash in its balance sheet. Considering a maximum additional indebtedness of 350 million for the equity reduction, TASA's proforma total debt to EBITDA ratio may increase to 1.5x, consistent with the rating category.

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 US$1,110 million and US$572 million, respectively. Telefonica S.A. of Spain controls, either directly or indirectly, 98% of TASA. THA controls 50% of Cointel, which in turn controls 64.8% of TASA.

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.