Fitch upgrades TASA, Cointel

Fitch Ratings upgraded the foreign and local currency senior unsecured ratings of Telefonica de Argentina SA (TASA) to B- from DD, of Compania Internacional de Telecomunicaciones SA (Cointel) to CC from DD, and of Telefonica Holding de Argentina SA to CCC from CC.

Fitch said the actions reflect the improvement in the debt maturity profile of TASA following the successful completion of the debt exchange in August 2003.

The debt exchange allowed TASA to lengthen its debt maturities and Cointel to reduce the amount of notes held by third parties maturing during 2004.

Nevertheless, TASA and particularly Cointel still face significant debt maturities over the next year, Fitch said. TASA faces the maturity of $81 million in outstanding senior notes due 2004 while Cointel faces the maturity of $225 million series A notes due 2004 and Ps175 million series B notes due 2004. Approximately $110 million of the two Cointel notes are held by third party noteholders, while the remaining portion are held by indirect parent company Telefonica Internacional.

The ratings of all three companies incorporate a level of implicit support from controlling shareholder Telefonica SA of Spain, which has provided flexibility in the intercompany loans to all three companies, Fitch noted. These intercompany loans, which are primarily short-term, have been continually rolled over the past two years.

TASA's ratings reflect its solid business position in the Argentine telecommunications sector, Fitch added. While TASA's financial flexibility and credit profile have been affected by the Argentine economic crisis, TASA continues to generate annual EBITDA of around $400 million, which is sufficient to cover annual interest expense of approximately $160 million (including interest on intercompany debt). TASA's debt maturity of US$81 million during 2004 appears manageable given the company's cash flow generation.

Cointel's ratings reflect its limited capacity to meet financial obligations since its subsidiary TASA is not currently paying dividends, Fitch said. Dividends received from TASA were historically Cointel's main source of funds. Since 2002, Cointel has been able to meet interest payments on its debt only after it received intercompany loans from indirect parent company Telefonica Internacional. Cointel continues to face significant refinancing risk since it has $110 million of third-party debt maturing in 2004.

Telefonica Holding, Cointel's direct parent company, only has $7 million in outstanding public notes; the majority of its debt is comprised of intercompany loans. Until 2001, Telefonica Holding's main source of funds was dividends received from Cointel. Because Cointel has not paid dividends since 2001, Telefonica Holding's current source of cash flow is management fees from TASA of $17 million during 2002, which are sufficient to meet annual interest payments on its notes.

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