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Fitch Upgrades Telecom Argentina to 'A(arg)'; Affirms Intl Scale IDRs; Outlook to Positive.

MONTERREY, Mexico & BUENOS AIRES, Argentina -- Fitch affirms Telecom Argentina's S.A. (TEO) foreign and local currency Issuer Default Rating (IDR) at 'B/RR4' and revised the Rating Outlook of the international scale IDRs to Positive from Stable. Approximately US$1.1 billion of debt in senior notes due 2011 and 2014 are affected by the rating action. Fitch also upgrades the national scale rating of TEO to 'A(arg)' from 'BBB+(arg)' with a Stable Rating Outlook.

The upgrade in the national scale and the revision of the Rating Outlook to Positive in the international scale reflects TEO's improved operating performance, continued pay down of debt and expected overall improvement in the company credit profile. The ratings of TEO reflect its solid business position in the northern region of Argentina, improved operating performance, strong financial profile and a manageable debt maturity profile following its debt restructuring. The ratings are constrained by significant regulatory risk particularly in the fixed line business, heightened competition in the mobile business, substitution of fixed services by mobile, and currency mismatch between its debt and its cash flow.

TEO has invested in expanding its mobile and broadband businesses that should allow the company to diversify away from the traditional fixed-line business. Telecom is well positioned to take advantage of the fixed-mobile convergence, as an integrated player in Argentina that has fixed and wireless services under the same group. The offering a fixed-mobile service should help the company to retain fixed lines as they mature and reduce churn rates in the wireless business as penetration approaches to a mature stage.

The company 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 generates enough cash flow to meet its capital expenditures needs and reduce indebtedness. The ratings also reflect a continuing exposure to foreign currency fluctuations because most of Telecom's revenues are peso-denominated while its debt is largely US dollar denominated. Capital expenditures to revenues during 2007 is expected to be similar to 2006, in the range of 14%-15%. Next year capital expenditures should be financed with internally generated cash flow and primarily used for expanding its mobile business and to a lesser extent its broadband business. Telecom will continue to use any excess cash to reduce debt as it cannot pay dividends and generates free cash flow.

TEO's financial profile has improved after the conclusion of its APE process, sustained with increased cash flow generation and lower debt levels. Credit protection measures for the last twelve months ended June 30, 2006 are consistent with the rating category. Total consolidated debt to last twelve months EBITDA was 2.0 times(x) and EBITDA to interest expense ended at 4.6x. Fitch does acknowledge that the company may use free cash flow to continue strengthening its financial profile. With expected consolidated EBITDA of approximately US$740 million for 2006, capital expenditures of approximately US$300 million, estimated interest expense of US120 million and assuming no major changes in working capital, Fitch expects that free cash flow should be in the range of US$300-US$320 million for 2006. As a result of this, credit metrics may continue to gradually improve over the medium term as the company operational performance continues to progress, as the mobile business gains scale, and consolidated debt levels may continue to decline.

Telecom Argentina is incumbent fixed line operator in the northern region of Argentina and part of Buenos Aires multiple area (AMBA) including more than half of the city of Buenos Aires providing local, long distance, data transmission an and internet services as well as mobile services in Argentina and Paraguay. The company has an integrated service offering in Argentina consisting of 4.0 million fixed lines, 6.9 million mobile and 338,000 Internet users as of June 30,2006. TEO had consolidated revenues and EBITDA during 2005 of ARP5.7 billion and ARP2.0 billion, respectively.

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.
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Publication:Business Wire
Date:Nov 9, 2006
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