44 th Telebrasil Panel Panel I Otávio Guazzelli June 2002

Topics - Agenda  Selected Changes in the Telecom Industry  Discuss sources of financing  The Brazilian Telecom sector: key investor concerns

Closure of Capital Markets and Unmet Growth Expectations  Equity capital markets virtually closed for competitive carriers  High yield investors become more selective due to increasing default levels  Investment grade issuers forced to pay significant premiums and “step-up” structures  Stricter syndicated loan markets – tighter covenants and diminished “market capacity” Recent Chapter 11 Filings

Equity Market Deterioration – Financial Distress in the CLEC Sector

Credit Quality Deterioration – AT&T is the Most Recent Case AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB Telecom Ratings Coverage

Telmex/America Movil Stands Out as One of the Best Performing Stocks in the Sector

Market Performance vs. Country Risk Premium – Brazil Note Brazil Wireless includes TCP, TRO, TMB, TND and TSU Brazil Wireline includes BRP, TNE and TSP

Financing – Financial Markets & Economic Context Defaults rates are expected to peak in 2002 and ease off by year- end as credit quality improves and the economy rebounds.  Corporate defaults soared in 2001, marking the third consecutive year that they have reached record levels. –During 2001, an aggregate debt amount of US$116 billion defaulted –The Telecommunications sector was the hardest hit in 2001 with 32 defaults, affecting 10.77% of all rated issuers –Telecom companies defaults represented approximately 15% of all corporate defaults in 2001 and the defaulted debt accounted for almost 30% of the aggregate defaulted debt –30 telecom operators defaulted with a total debt amount in excess of US$30.9 billion

Bond Market - Brazil  Brazil has yet to see a bond issuance out of the telecom industry  Incumbents are the only players currently able to tap the bond market  PRI structure would be required Bond investors would well receive the incumbents in a PRI structured transaction

Syndicated Loans - Brazil  Limited ability to further increase exposure to the telecom sector  Increasing market volatility should limit “windows of opportunity” until the end of the year Syndicated Loans have been one of the major forms of external financing to the industry

Vendor Financing Environment  In 2001, vendors have significantly increased provisions towards their financing commitments (average provision – as a percentage of collectibles – amongst seven of the industry’s largest suppliers increased from 7.5% in 2000 to 32% in 2001).  Vendors have sought to reduce/cancel their financing commitments to the extent possible (e.g. when conditions precedent not met).  Vendors have become more conservative in extending financing: they have increasingly offered financing to best clients with some track record of business plan performance and high likelihood of future equipment purchases.  Vendors have significantly improved the disclosure of information related to vendor financing

Vendor Financing  Some operators did not meet the “Conditions Precedent” in 2001 required to fund the loans. Vendors therefore terminated those commitments.  Few new deals on the market in 2001  Deals were repaid, refinanced or written-off

Unproven business modelsProven business models Investors Focused On Cash Flow  Investors favor strong cash flow and credit statistics  Investors are seeking “winners” of the consolidation game  Still able to tap selectively the various capital markets  Experiencing depressed valuations such as the industry as a whole  Financial flexibility will fuel growth and consolidation  Will require recourse financing through break-even cash flow  Industry-wide losses and readily available alternatives will limit investor interest  Likely to resort to balance sheet restructuring as the sole form of additional financing

Key Issues  Telecom is a capital intensive business and needs scale  Reducing margins contribute to more consolidation  Investors’ risk aversion to unproven business models will induce more consolidation  Balance between competition and build-out/service requirements and profitability/economic viability to preserve future investments in the sector Consolidation Regulatory  Anatel has built a strong track record to date that should be preserved  Interconnection, unbundling, infrastructure build-out,…are some of the aspects that have a direct impact on competition and therefore are important to investors  Debate focus on the next phase of the telecom sector and regulator’s goal in the future  Quality of service / affordability?  Competition?  Universalization?  Economic viability?