Fitch Ratings has taken the following rating actions to Brasil Telecom Participacoes S.A. (BRP) and Brasil Telecom S.A. (BTM):
BRP
--Local Currency Long-Term IDR 'BBB' maintained on Rating Watch Negative;
--National Long-Term Rating affirmed at 'AA+(bra)', removed from Rating Watch Negative, Rating Outlook Stable.
BTM
--Local Currency Long-Term IDR 'BBB' maintained on Rating Watch Negative;
--National Long-Term Rating affirmed at 'AA+(bra)', removed from Rating Watch Negative, Rating Outlook Stable
--National Long-Term Rating for the fifth issue of debentures in the amount of BRL1.08bn affirmed at 'AA+(bra)',removed from, Rating Watch Negative;
--Long-Term International Rating 'BBB' for its guaranteed against political risk notes, (PRI), in the amount of USD200m, maturing in 2014, maintained on Rating Watch Negative.
The Rating Watch Negative was assigned on April 2008, following the announcement by Telemar Norte Leste S.A. (TMAR) of its intention to acquire control of BRP. Should this acquisition be completed, Fitch expects to downgrade by one notch the Local Currency Long Term IDR for BRP and BTM, as well as the rating for the PRI notes, in order to be more consistent with the greater financial leverage to be assumed by the new group. The Long Term National Scale Ratings would remain with the same rating level, but would become weak in the category. On the other hand, should this acquisition fail to occur, the Rating Watch Negative would be removed. Fitch understands that the probable gains in synergies from the creation of a new large group in the telecommunications sector through the combination of the activities of BTM and TMAR are insufficient to offset the immediate pressure that will occur on the credit protection measures of the new entity in relation to the actual consolidated BRP's credit metrics.
Ratings of BRP and BTM, denominated together as Brasil Telecom, reflect its strong financial profile, significant liquidity position, high cash flow from operations, solid position in its business region and diversified service offering. Concerns include heightened competition and moderate regulatory risk in the Brazilian telecommunications sector.
Brasil Telecom's conservative financial profile is consistent with its present rating category. The company has low financial leverage and high cash balances. For the 12 months ended June 30, 2008, total debt-to-EBITDA and funds from operations (FFO) adjusted leverage ratios were 1.1 times (x) and 1.0x, respectively, while coverage ratios of interest expense-to-EBITDA and FFO interest coverage were 10.2x and 10.9x, respectively. Brasil Telecom's liquidity position is solid, supported by high balances of cash and marketable securities and an extended debt profile. For the period ending Jun.30, 2008, Brasil Telecom had cash balances of BRL3.1bn, higher than the amount of its debt maturities until the end of 2011. The company also reported substantial free cash flow of BRL1.2bn for the 12 months ended on Jun 30, 2008. If the TMAR acquisition takes place, it can result in increased cash distributions to TMAR to handle its greater financial leveraging.
Brasil Telecom has an extended debt profile and low foreign exchange exposure. At first half of 2008, Brasil Telecom had total debt of BRL4.2bn, concentrated in the operating company (BTM), which enabled BRP to have the same rating level as BTM. The short-term portion was only 12% and, given its hedge operations, only 8% of the total debt bore foreign currency exposure. The debt was mainly comprised of BRL2.2bn in operations with Banco Nacional de Desenvolvimento Economico e Social (BNDES) and BRL1.1bn in debentures. Brasil Telecom's secured debt refers to the BNDES operations, guaranteed by receivables.
Brasil Telecom benefits from its strong market position, which translates into intense cash flow from operations (CFO). The company has been able to compensate for the decline in its mature fixed line business through expansion in mobile telephony and data communications. For the 12 months ended Jun.30, 2008, the number of mobile telephony customers and broadband accesses grew 33% and 18%, respectively. Fitch understands that the company faces great competition in its diverse business fields, but it is capable of maintaining its prominent position in fixed telephony and long distance calls in its concession area, as well as building its customer base in other businesses. Diversification in services and the possibility of offering combined services strengthens Brasil Telecom's competitive position. The recent acquisition of a license to operate in 3G on the 2100 Mhz frequency throughout its concession area should underpin the company's source of revenues.
On a consolidated basis, Brasil Telecom has succeeded in gradually building its net revenue and maintaining its EBITDA margin at satisfactory levels. The average annual growth rate of net income was 6.8% from 2004 to 2007. Meanwhile, the EBITDA margin in recent years has been in the 33%-35% range. For the 12 months ended H108, the company reported net revenue of BRL11.2bn and EBITDA of BRL3.9bn, with an EBITDA margin of 35%. Going forward, the improvement in EBITDA margins is likely to be driven by the mobile telephony business.
Brasil Telecom operates with fixed lines, long distance calls, mobile telephony and data transmission, mainly in Region II, which comprises the Brazilian states in the south and midwestern regions, in addition to Acre and Rondonia. BRP, which is the group's holding company, is controlled by Solpart Participacoes S.A. (Solpart). Citigroup and pension funds control Solpart.
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.
Contacts:
Mauro Storino, +55 21 4503-2600 (Rio de Janeiro)
Sergio
Rodriguez, CFA, +52 81 8399-9100 (Monterrey)
Media Relations
Cindy
Stoller, +1-212-908-0526 (New York)
