Moody's may downgrade Brasil Telecom

Moody's Investors Service said it placed Brasil Telecom SA's Baa3 long-term global local-currency debt rating, Aa1.br Brazilian national scale rating and Baa3 $200 million 9 3/8 % structured notes due 2014 on review for possible downgrade.

The review reflects Moody's concerns about the competitive and operating challenges facing Brasil Telecom and its ability to maintain operating margins and overall credit metrics commensurate with the Baa3 category.

For the year ended Dec. 31, Brasil Telecom posted an EBITDA margin of 35% compared to a margin of 42% in 2004. Free cash flow to debt was also weaker in 2005 at 4%, compared with 8% in 2004. The agency said Brasil Telecom's margins have principally suffered from continued migration of its higher-margin fixed traffic to mobile and because it only started its wireless operations in 2004.

While Brasil Telecom's wireless operations have successfully concluded their main investment phase, Moody's said it does not expect the wireless segment to generate positive EBITDA until 2007 and wireless operations are likely to continue to require significant marketing spending given the fierce competitive environment for wireless in Brazil.

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