Fitch Rates Telemar's Proposed Notes 'BBB-'; Affirms Ratings

MONTERREY, Mexico & RIO DE JANEIRO, Brazil--(Business Wire)--
Fitch has taken the following actions for Tele Norte Leste
Participacoes S.A. (TNE) and Telemar Norte Leste S.A. (TMAR),
collectively refer to as Oi:

TNE

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

--Foreign Currency IDR affirmed at 'BBB-';

--National scale rating affirmed at 'AA+(bra)';

TMAR

--Local Currency IDR affirmed at 'BBB-';

--Foreign Currency IDR affirmed at 'BBB-';

--National scale rating affirmed at 'AA+(bra);

All ratings are removed from Negative Rating Watch. The Rating
Outlook is Stable.

Fitch has also assigned a 'BBB-' rating to the proposed US$1.5
billion Sr. Notes to be offered by TMAR. Proceeds from the notes are
expected to be used to complete funding for the Brasil Telecom
acquisition.

The rating action reflects Fitch's expectation that Oi's capital
structure will remain in levels consistent with the rating category
whether or not the acquisition of Brasil Telecom is completed as it
needs approval by the Brazilian authorities. Oi is expected to
continue raising the necessary funds to complete the acquisition. If
the transaction is approved, Fitch expects on a proforma basis
including Brasil Telecom and necessary funding, total-debt to EBITDA
and net-debt to EBITDA ratios should approximate to 2.4-2.5 times(x)
and 1.8-2.0x, respectively. Total debt-to-EBITDA is expected to
strengthen over the next few years to levels close to 1.7x, which
Fitch views to be the company's long term target capital structure. In
the event that the transaction is not approved, Fitch expects Oi will
repay debt with cash balances to reduce leverage to levels more in
line with its long term target capital structure after disbursing
BRL3.9 billion for a TMAR extraordinary dividend and paying BRL490
million to Brasil Telecom's majority shareholders of a break up fee;
in addition Oi will probably try to dispose of Brasil Telecom's shares
already acquired in the voluntary tender offers.

Oi's revenue mix, cash flow generation and business risk is not
expected to materially change with the acquisition of Brasil Telecom.
While the main cash flow generator will continue to be the local
service segment, both companies continue to face challenges in fixed
local services as mobile and broadband substitution continues to gain
presence in local traffic. Fitch expects that fixed-line revenue
declines should be compensated by other services. Future growth for
the next few years, in revenues and cash flow, should be driven by
data and mobile services including the recently acquired Amazonia
Celular and the launching of mobile operations in Sao Paulo by the end
of the year.

Fitch believes the integration of Brasil Telecom operations into
Oi should increase the competitive position of the company,
particularly in the mobile and corporate segments, and geographically
complement the fixed and broadband businesses. Mobile services should
benefit from a nationwide network and the offering of attractive
bundle solutions with integrated fixed and mobile voice, broadband and
video services which can result in increased market share in the
mobile segment, particularly in Region II, where Brasil Telecom share
is about 14%. The addition of Brasil Telecom's backbone into Oi,
should create a national backbone for domestic corporate networks very
similar to Embratel's backbone. After the transaction is closed,
Brasil Telecom Participacoes S.A. (BRP) and its subsidiary Brasil
Telecom S.A. (BTM) will merge and become a wholly own subsidiary of
TMAR. Fitch expects the new group to have a strong cash flow
generation and to incorporate some synergies.

Brasil Telecom acquisition by Oi still needs approval of antitrust
authority CADE and by the government who needs to change the Brazilian
National Plan of Concessions (Plano Geral de Outorgas - PGO). CADE
resolution is expected by no later than the end of November while
government change of the PGO may occur by the end of the year. To
change the PGO, the president of Brazil has to decide the number of
incumbents and then Anatel needs to give its approval. If the
acquisition is not approved by the end of the year, Brasil Telecom
controlling shareholders have the right to extend the purchase
agreement until April 2009.

Regulatory risk is moderate. On August of 2008, the SDE opened
administrative processes on the four biggest mobile players, including
Oi's mobile subsidiary, for the mobile network termination rates
(VU-M). While according to regulation VUM rates are freely negotiated
between operators within the next three years, Fitch notes that an
eventual reduction in this rate can have a negative short term effect
in revenues that should be compensated by increase usage due to
elasticity of demand. Present regulatory issues include the
introduction in phases between September of 2008 and March of 2009 of
number portability for fixed and mobile services, a probable auction
for Wimax licenses during 2009 and the change of PL29 which should
allow telecom operators to provide broadcasting services. While is too
early to determine the final outcome of number portability, Fitch
believes that mobile operations of Oi and Brasil Telecom should
benefit from portability and the fixed-line segments should be under
additional pressure but should be somewhat mitigated with bundles such
as 'Oi Conta Total'. In line with the expected changes of PL29, Oi has
applied for a DTH license in order to provide on its own this service
in all areas excluding those where Way TV provides services.

Oi's liquidity risk is reasonable, with expected cash balances of
approximately BRL3.0 billion by year-end (plus another BRL3.0 billion
from Brasil Telecom if the acquisition is completed), strong cash
generation and manageable debt maturity profile. The company will face
maturities of approximately BRL5.2 billion in 2010, which most likely
should be refinanced despite expected cash on balance sheet and cash
flow generation. Total gross indebtedness at TNE is expected to
increase to approximately BRL20.8 billion by the end of 2008 plus the
consolidation of debt from Brasil Telecom. Total unconsolidated debt
at TNE amounted to BRL1.2 billion as of Jun.30, 2008. Going forward
Fitch expects that all debt should be allocated at TMAR, leaving TNE
with no debt. In addition to BTM's debt if the acquisition is
completed, TNE's total debt by year-end should be composed of BRL4.3
billion loan by Banco do Brasil, BRL3.6 billion of promissory notes,
BRL3.3 billion of BNDES financing, BRL2.4 billion in international
bonds, BRL2.3 billion in debentures and BRL4.9 billion in other debt
including swaps.

Credit protection measures are expected to gradually improve over
the next few years as the company generates free cash flow. On a
proforma basis, considering full year 2008 operations of Brasil
Telecom and increase in indebtedness, total debt-to-EBTIDA, FFO
adjusted leverage and EBITDA-to interest expense should approximate
2.4x, 2.4x and 8.7x, respectively. While 2008 will result in negative
free cash flow due to acquisitions, TNE is expected to generate free
cash flow over the next few years that should support a reduction in
the leverage of the company. TMAR is expected to pay dividends of 100%
of net income over the next few years.

Oi provides fixed telecommunications services in region I, which
comprises 16 states and includes Rio de Janeiro. The company also
provides Internet, data transmission, long-distance and mobile
services. TNE, who controls Oi, is majority controlled by Telemar
Participacoes S.A.(TMARPART), which is in turn controlled by a group
of Brazilian investors. Brasil Telecom provides fixed-line local,
long-distance data transmission and mobile services in Region II,
which comprises southern and midwestern Brazil. For full year-end
2008, proforma revenues and EBTIDA for the new entity, considering the
acquisition, should approximate to over BRL29.5 billion and BRL10.5
billion, respectively.

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.

Fitch Ratings
Sergio Rodriguez, CFA, +52 81 8399-9100 (Monterrey)
Mauro Storino, +55 21 4503-2600 (Rio de Janeiro)
Media Relations:
Jaqueline Carvalho, +55 21 4503 2623 (Rio de Janeiro RJ)
Cindy Stoller, +1-212-908-0526 (New York)

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