Fitch Affirms Telefonica del Peru's Ratings at 'BBB+'

Fitch Ratings has affirmed Telefonica del Peru S.A.A.'s (TDP) ratings as follows:

--Local currency Issuer Default Rating (IDR) at 'BBB+';

--Foreign currency IDR at 'BBB+';

--PEN754 million senior notes due 2016 at 'BBB+'.

The Rating Outlook for the corporate ratings remains Stable.

In addition, Fitch's Peruvian affiliate, Apoyo & Asociados, currently rates TDP 'AAA(pe)' in the national scale category.

TDP's ratings are supported by its strong consolidated financial profile, low leverage, healthy cash flow generation and manageable debt maturity. TDP and its subsidiaries present a solid business position as the largest Peruvian telecommunications group and a diversified revenue stream with integrated operations from their various business segments. TDP is controlled by Telefonica SA (Telefonica) in Spain (Fitch IDR of 'BBB+'), with relevant presence in Latin America and a history of support to some of its subsidiaries. However, both companies currently carry the same credit strength, thus the ratings factor in that any support would be on a case by case basis. As limiting factors, the ratings incorporate moderate regulatory and political risks and heightened competition.

Financial Profile Should Remain Strong:

TDP's consolidated credit protection measures are expected to remain strong, even in a stress scenario. For the last 12 months (LTM) ended March 31, 2012, leverage measured by total debt-to-EBITDA of 1.3x and net debt-to-EBITDA of 1.1x were in line with the previous years. On a stress scenario basis, considering PEN1 billion of additional debt, these ratios would be, on a pro forma basis, 1.6x and 1.4x, respectively, still at conservative levels. Fitch incorporates in TDP's ratings a gross leverage not higher than 2.0x.

High Operational Cash Flow Generation, Despite Margin Reduction:

On a consolidated basis, TDP has been able to compensate for the decline in traditional local fixed telephony and long distance revenues, mainly through the growth in the mobile, broadband and pay-TV businesses. For the LTM ended March 31, 2012, net revenues of PEN7.9 billion were 6.6% higher than in 2010. For this same period, EBITDA of PEN2.9 billion was 6.6% lower than the amount reported in 2010, but EBITDA margin of 37.2% still compares favorably with its peers in Latin America. EBITDA margin reduction is related to increased competition and higher penetration in lower-income classes.

TDP's consolidated cash flow generation is high. In the LTM ended March 31, 2012, cash flow from operations (CFFO) of PEN2 billion, while slightly lower than the PEN2.1 billion achieved in 2010, was sufficient to supply capex of PEN1.5 billion and dividends of PEN273 million, resulting in free cash flow (FCF) of PEN222 million. Different from previous years, TDP reduced dividend payments in order to use the cash saved to reduce debt. In 2012, positive FCF will depend on the pending decision by TDP related to transferring resources to the parent company. The company's flexibility to reduce dividends in case of necessity is viewed as positive.

Leading Business Position:

Fitch expects TDP and its subsidiary Telefonica Moviles S.A. (Moviles) to keep their respective leading market positions in the fixed line and mobile business. TDP's market share in voice is 86.2%, with 89.6% in fixed-broadband, and 62.0% in pay-TV, while Moviles has a 61.2% share in the mobile segment. The group benefits from economies of scale, extensive network coverage and established brand name. The strategy of growing its broadband and pay-TV businesses, which still offers good growth prospects, as well as the mobile business, should help diversify its revenue away from local regulated services which are mature and partially offset revenue declines in more mature segments. Concerns relate to heightened competition in the Peruvian telecom market.

Debt Maturity Schedule is Manageable; Liquidity Should Improve:

On a consolidated basis, TDP has an adequate debt profile, with manageable debt maturities and minimal exposure to foreign currency. At the end of March 2012, the group's consolidated debt was moderately reduced to PEN3.7 billion from PEN4.2 billion presented at the end of 2010. Fitch expects TDP to improve its liquidity position during the year as short-term debt of PEN1 billion represented 28% of total debt, and its liquidity position of PEN494 million was lower than historical levels, covering just 47% of short-term debt. Positively, the ratio of CFO+cash/short-term debt at 2.4x continued to be robust on March 31, 2012. Outstanding debt is not expected to change significantly until the end of the year, but Fitch considers the improvement in the cash position and the reduction of short-term debt important for future analysis.

Regulatory and Political Risks Are Moderate:

Fitch incorporates moderate regulatory and political risks into the ratings. Currently, the main issue is related to the renewal of three of Moviles' concessions to operate in the mobile segment that expired in 2011 and 2012. Although the renewals were requested earlier by the company, there is still some uncertainty as to whether they will be approved and under what conditions. The mobile business represented 34% of TDP's consolidated revenues and around 50% of EBITDA in the LTM ended March 31, 2012, being an important driver for growth to the group and potentially strategic in the offering of bundled services to customers in the future.

Key Rating Drivers:

A weakening in TDP's consolidated operational performance or financial profile or further downgrades for Telefonica SA can negatively pressure its ratings. Failure of renewal of the concessions to operate in the mobile segment, which are in the renewal process with the Ministry of Transports and Telecommunications, can also be a trigger for a negative rating action. Fitch will also continue to monitor the company's pending process with the Peruvian Superintendencia Nacional de Administracion Tributaria (SUNAT) related to income taxes referred to 2000 and 2001. In case a significant contingent liability materializes, , Fitch will analyze its impact on the ratings. An upgrade for TDP's LC IDR is limited due to the downgrade in Telefonica SA on September 2011.

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:

--Corporate Rating Methodology (Aug. 12, 2011);

--Rating Global Telecoms Companies (Sept. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Global Telecoms Companies - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205

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