TEXT-S&P summary: Telefonica S.A.

(The following statement was released by the rating agency)

Oct 03 - ============================================================================== Summary analysis -- Telefonica S.A. ------------------------------- 03-Oct-2012 =============================================================================== CREDIT RATING: BBB/Negative/A-2 Country: Spain Primary SIC: Telephone communications, exc. radio Mult. CUSIP6: 879382 =============================================================================== Credit Rating History: Local currency Foreign currency 24-May-2012 BBB/A-2 BBB/A-2 11-Aug-2011 BBB+/A-2 BBB+/A-2 02-Dec-2008 A-/A-2 A-/A-2 =============================================================================== Rationale

The ratings on Spain-based telecommunications operator Telefonica S.A. are supported by Standard & Poor's Ratings Services' view of the group's business risk profile as "strong" and its financial risk profile as "significant."

We think the group's business profile is supported by its large scale, wide geographic diversification across Europe and Latin America, and leading competitive positions, including entrenched positions in the fixed and mobile telecoms markets of Spain and Brazil. This translates into robust generation of funds from operations. These business strengths are mitigated, however, by a depressed domestic economic environment (accounting for roughly one-quarter and one-third of consolidated revenues and EBITDA, respectively), exacerbating intense price competition in the telecommunications market, heavy capital intensity in the industry, ongoing regulatory constraints, and exposure to various country and currency risks.

Telefonica's financial risk profile is constrained by the group's significant debt leverage, heavy absolute debt level, and maturities that are due in the next few years in the context of challenging capital market conditions.

Telefonica's rating is not directly constrained by that on Spain (BBB+/Negative/A-2), as Telefonica's "moderate" exposure to Spain, combined with the "moderate" sensitivity of the telecom sector to country risk, as per our criteria, could potentially allow us to rate Telefonica up to three notches above the sovereign, as long as the latter remains investment grade, and up to two notches if we lowered Spain's rating to 'BB+'(see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," June 14, 2011).