Fitch Affirms Telefonica Chile's IDR at 'BBB+'; Outlook Stable.

MONTERREY, Mexico -- Fitch Ratings has affirmed the following ratings of Compania de Telecomunicaciones de Chile S.A. (Telefonica Chile):

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

-Foreign Currency IDR at 'BBB+';

-National-scale IDR at 'AA-(Chl)';

-National scale short-term IDR at 'F1+(Chl)';

-Local bonds series L and F at 'AA-(Chl)';

The Rating Outlook is Stable.

Telefonica Chile's ratings are supported by its leading position in the Chilean market, strong free cash flow generation, and solid financial profile. The ratings reflect increased competition, moderate regulatory risk, weaknesses in local traffic and the policy of returning cash to shareholders via dividends or capital reductions, implemented during 2007. The ratings also incorporate the change in reporting by adopting IFRS (International Financial Reporting Standards) from Chilean GAAP starting 2009 and the dividend policy of paying 100% of net income.

The strategy of introducing broadband and pay television services to customers as a bundled offering has mitigated declines in lines in service (LIS) and has helped increase customer loyalty. In addition, increases in broadband and pay television services have compensated for pressure in traditional voice services due to increased competition and traffic migration to mobile networks. It is expected that these services, offered in bundled packages of double or triple play, should help maintain relatively stable cash flow generation and the LIS over the next few years as local traffic from fixed lines continues to decline.

Telefonica Chile has lower exposure to regulatory risk related to tariff decrees as a result of its strategy to migrate its customers from regulated plans to flexible unregulated plans. Approximately 19% of revenues are now related to regulated services, compared to 50% in 2004 when the last tariff decree was set, and this revenue is expected to continue to become less important during the next few years as a proportion of total revenues. The new tariff decree for the 2009-2014 period is in its setting process and is expected to become effective by May 2009. As per a request from the regulator 'Subtel', the antitrust authority is reviewing the Chilean telecom industry in order to determine whether Telefonica Chile has a dominant position. The review can result in a liberalization of certain tariffs, other than access charges as they have to be regulated, or for the company to still be considered dominant, resulting in a similar exposure to regulated revenues. The tariff decree includes regulated plans' fixed and measured service charges, along with interconnection and access charges. In June 2008, voice over internet protocol (VoIP) ruling was made in order to give authorization to offer voice services through a broadband connection. With the ruling Telefonica Chile should add this service to its offering to continue strengthening its voice service offering.

During October 2008, Telefonica S.A. successfully completed a tender offer to increase its ownership in Telefonica Chile to 96.75% from 44.9%. The transaction is consistent with Telefonica's strategy in Latin America in terms of ownership. In addition, the adoption of IFRS should have some accounting effects but should not alter the economic profile of the business. Some expected results should be higher dividend payments as a result of higher net income and the entering into a process of renegotiation of its financial covenants in order to reflect the IFRS adoption, as they were originally set using Chilean GAAP.

The company's strong brand equity, leading market position, and operational experience should allow it to maintain strong free cash flow generation and a stable financial profile, with relatively stable debt levels, despite competitive challenges. Absolute EBITDA levels should remain relatively stable despite an expected decrease in EBITDA margins due to the IFRS adoption and margin pressure associated with growth in pay television and broadband segments. For the last 12 months ended Sept. 30, 2008, funds from operations (FFO) adjusted leverage was 1.7 times (x) and total debt to EBITDA was 1.5x. Coverage ratios of FFO interest coverage and EBITDA to gross interest were 8.8x and 9.7x respectively. The ratings incorporate expectation that total debt to EBITDA should remain stable at or below 2.0x.

Over the next few years Telefonica Chile should generate free cash flow in the range of US$100 million to US$150 million as the company continues investing primarily in its broadband, pay television and data businesses. The company has a strong liquidity position underpinned by strong free cash flow and a manageable debt maturity profile. Total debt is expected to remain relatively stable over the next few years, with upcoming maturities for the next few years most likely being refinanced. As of Sept. 30, 2008 gross debt including hedges totaled US$798 million, composed of US$538 million in syndicated loans, US$129 million in local bonds and US$131 million in other bank loans. The company debt has no exposure to the US$ after hedges; only 16% is exposed to inflation through UF and 84% has a floating interest rate.

Telefonica is one of the largest telecommunications providers in Chile, with US$1.385 billion in revenues and US$570 million in EBITDA for the last 12 months ended Sept. 30, 2008. The company is the largest local-service operator with 2.1 million lines in service, and 695,000 ADSL connections and 251,000 Television customers. Telefonica Chile is now 97% owned by Spain's Telefonica S.A.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.