Fitch Upgrades Telefonica de Argentina to 'AA-(arg)'; Affirms International Scale Ratings.
MONTERREY, Mexico & BUENOS AIRES Buenos Aires (bwā`nəs ī`rēz, âr`ēz, Span. bwā`nōs ī`rās), city and federal district (1991 pop. , Argentina -- Fitch Ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has taken the following rating actions for Telefonica de Argentina S.A. (TASA) and Telefonica Holding de Argentina S.A. (THA THA Total hip arthroplasty. See Total hip replacement. ). All ratings have a Stable Outlook:
--International scale local currency Issuer Default Rating (IDR IDR
In currencies, this is the abbreviation for the Indonesian Rupiah.
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) affirmed af·firm
v. af·firmed, af·firm·ing, af·firms
1. To declare positively or firmly; maintain to be true.
2. To support or uphold the validity of; confirm.
v.intr. 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)'.
--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 Intercompany loan
Loan made by one unit of a corporation to another unit of the same corporation. , 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 Tisa, river: see Tisza. ) 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 (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become 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 ILEC, short for incumbent local exchange carrier, is a local telephone company in the United States that was in existence at the time of the break up of AT&T into the Regional Bell Operating Companies (RBOCs) also known as the "Baby Bells". in the southern region of Argentina providing local service, long distance, broadband services See broadband and broadband service provider. and dial up Internet access See how to access the Internet. 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.
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