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Fitch Affirms Telefonica Moviles Chile at 'BBB+'; Outlook Stable

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following ratings for Telefonica Moviles Chile S.A. (TMCH):

--Local currency IDR at 'BBB+';

--Foreign currency IDR at 'BBB+';

--US$300 million senior notes due 2015 at 'BBB+'.

--National scale at 'AA(cl)';

--Series A and B local bond issuances due 2014 registered under line #589 at 'AA(cl)';

--Series C and D local bond issuances due 2016 registered under line #590 at 'AA(cl)'.

The Rating Outlook is Stable.

TMCH's ratings reflect its strong market position, mobile services portfolio, moderate regulatory risk and financial flexibility. TMCH's solid financial profile incorporates the expectation of stable leverage and strong funds from operations (FFO) generation. The ratings also take into account the leadership position of TMCH in Chile, strategy and capacity to improve the mix of post-paid customers by upscaling services to customers and approach to preserve and maximize average revenue per user (ARPU).

The ratings also consider ownership by Telefonica S.A. (TEF; rated 'BBB+' with a Negative Outlook by Fitch). In the event that Fitch downgrades Telefonica S.A. (TEF) by one notch, Fitch believes that TMCH ratings can stay at 'BBB+' provided the company keeps its financial policies unchanged and TEF liquidity position remains manageable.

However future multiple notch downgrades of TEF are likely to drag TMCH ratings. TEF also owns Telefonica Chile which offers complementary fixed telecommunication services. The relationship between these companies allows TMCH to achieve synergies in costs and investments, manage a single brand and unification of points of sale, among other things.

Mobile Broadband Growth to Continue:

Fitch believes value-added services (VAS) and mobile broadband should help mitigate a future slowdown in revenue growth from traditional voice services, given the level of mobile penetration in the country and expectation of access charges declines in 2014. Widespread adoption of data services through smartphones offers potential revenue growth that should be sufficient to offset traditional voice and interconnection revenue declines in the future. (approximately 13% of mobile users have data services). Revenues from mobile broadband (excluding text messaging) now account for approximately 12% of service revenue. According to Subtel, as of June 30, 2012 penetration of mobile voice reached 128.9% or 22.4 million users.

Strong Competitive Environment:

Competition is strong. Additionally, the introduction of number portability in December 2011 and the entrance of MVNOs have intensified competition. Number portability has resulted in net ports of 75,000 of TMCH to other providers as of Sept. 10, 2012. However new additions have offset this effect. Fitch expects this trend to continue as TMCH has focused more on profitable growth. MVNOs should have a mixed effect to TMCH's results as they should add competition. However, target niche markets and the agreement to provide network infrastructure to them should continue to provide TMCH's cash flow with solid margins.

Lower Interconnection Rates Expected:

Fitch expects a significant reduction in mobile termination rates during the tariff setting process of next year (effective starting 2014). The mobile termination rate could decline 50% or more. With a rate reduction of this magnitude, revenues coming from interconnection may decline materially to consolidated revenue. Mobile data revenues growth should compensate for revenue declines related to reductions in mobile interconnection rates. Longer term, Fitch views mobile termination rates as converging to the fixed termination rates.

Strong financial profile and extended maturity profile:

Fitch incorporates in its ratings for TMCH that leverage measured by total debt to EBITDA should be close to 1.0 time(x) in the long term. Increased FFO and relatively stable capital expenditures should result in growing free cash flow over the next few years. This in turn should strengthen TMCH's ability to meet its financial obligations. For the 12 months ended June 30, 2012 leverage measured as total debt to EBITDA stood at 1.1x and net debt to EBITDA at 0.3x. TMCH's maturity profile is very manageable. No maturities are schedule until 2014, when CLP58 billion comes due. along with cash and marketable securities of CLP290 billion.

Key Rating Drivers:

Factors that can drive a rating downgrade or Outlook revision to Negative includes multiple notch downgrades of the parent company or if TMCH's operating performance declines rapidly due to competition, convergence of services or regulation that results in a sustained increase in leverage over 2.0x. Positive factors to credit quality include an increase in FCF and broader service revenue diversification while maintaining a strong financial profile.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Telecom Companies' (Aug. 9, 2012);

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'National Ratings Criteria' (Jan. 19, 2011);

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)' (Aug. 10, 2012).

Applicable Criteria and Related Research:

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

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Fitch Ratings
Primary Analyst
Sergio Rodriguez, CFA, +52-81-8399-9100
Senior Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, Mexico
or
Francisco Mercadal, +56-2-499-3340
Associate Director
or
Committee Chairperson
Alberto Moreno, +52-81-8399-9100
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings