Moody's understands that about half of the proceeds from the proposed debentures will be used to pay for the 20+20MHz band in the frequency range of 2.5GHz auctioned by Anatel last June. The remaining half will be used to refinance certain short term debt.
"Telefônica Brasil's ratings reflect the company's position as the largest integrated telecom company in Brazil in terms of revenue and number of wireless subscribers as well as its solid profitability level with adjusted EBITDA margin of 38% during LTM ended June 2012", said Nymia Almeida, a Vice President and senior analyst at Moody's.
Moreover, the ratings consider Telefônica Brasil's conservative financial profile, robust credit metrics, solid liquidity position, strong brands and good geographic diversification. On the other hand, the ratings are constrained by Telefônica Brasil's sizeable exposure to the wireline business, which accounted for 38% of total revenue during 2Q12, as Moody's expect revenue and profitability in this segment to continue to decline due to lines in service (LIS) disconnections and tougher competition arising from new entrants, such as Tim Fiber and GVT.
Furthermore, the ratings are also constrained by the company's low free cash flow due to high capex and aggressive dividend payout ratio, which in their view will be maintained during the next years.
The stable outlook reflects Telefonica Brasil's strong and stable cash flow from operations and Moody's expectations that the company will maintain a financial profile consistent with its current rating category.
Upward pressure on ratings is deemed unlikely near term given the increase in the competitive environment, competitive challenges in all segments and still some revenue concentration in the mature/declining wireline business. Over the long term, increased revenue diversification into higher growth segments such mobile, data, broadband and video, while improving current debt protection measures and cash flow based metrics, could result in upward ratings pressure.
Telefônica Brasil's ratings could come under downward pressure if competitive threats negatively affect the company's operating performance more than expected, causing a meaningful decline on revenues and margins. Ratings would also be negatively impacted in case the company engages in a material debt financed return of capital or M&A activity, resulting in a Total Adjusted Debt to EBITDA above 2 times for an extended period. Additional negative factors may arise if Spain-based Telefónica's credit profile and liquidity position deteriorate further on the back of an even worse than expected EU crisis.
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