Telmex Reacts to Rate Cuts

The reduction in Mexico's central bank interest rate from 7.75% to 7.5% has forced down borrowing costs on floating-rate securities. Thus, Telefonos de Mexico (TMX - Analyst Report or Telmex), Mexico's leading fixed-lined phone operator, plans to sell MXN$8 billion (US$598 million) floating-rate bonds to refinance its debt and meet general corporate purpose.

Telmex Internacional SAB (TII - Analyst Report), spun off in June 2008 from Telmex, is expected to sell approx MXN$5 billion ($375 million) in bonds, which will fetch MXN$10 billion for the company. This will help it to expand its presence with broadband and local services and also to introduce value-added services for the corporate market, and Internet and voice services and triple-play services in the residential market for a total investment of US$1.1 billion in 2009.

We expect a fall in Telmex's revenues, EBITDA, and net profit during the second quarter of 2009, with the recent outbreak of swine flu in Mexico and the Easter holidays falling in April instead of March. Holidays in the second quarter will reduce the company's ability to install new phone lines and sell to its clients.

Moreover, an approval by the Mexican regulator to provide pay TV service in 2009 is also doubtful. Thus, we reiterate our Sell rating on Telmex.

U.S. telecommunications and cable industry is expected to face a challenging operating environment in 2009. In addition to the stagnant wireline business, the fiercely competitive environment and the global financial crisis will stunt growth of the wireless industry in Latin America. However, we continue to rate the shares of TII, TIM Participações S.A. (TSU - Analyst Report), Brasil Telecom Participações S.A. (BRP - Analyst Report), Oi Participações (TNE - Analyst Report) Holds, based on their strong technical capabilities and their nationwide network in Latin America.