Moody's Investors Service knocked a telecom securitization from Peru down two pegs to Baa3' last week. Telefonica del Peru Grantor Trust had already dropped a couple of rungs from A1', where it stood at close in December 1998. Backed with flows stemming from calls between Telefonica del Peru and international carriers, the transaction has US$39 million outstanding, thanks in part to a US$55 million prepayment. Totaling US$150 million at issuance, it matures in 2008. Pre-merger JP Morgan was underwriter.

The transaction has been assaulted on both the domestic and foreign fronts. Many of the designated carriers that originate the securitized payments have been in trouble since 2000. "It's very much related to the trouble of telecoms in the state," said Christian Corcino, senior associate of Latin America structured finance at Moody's. Among the designated companies are AT&T, WorldCom, and Sprint, all of which are in significantly worse shape than when Peru Grantor came out five years ago.

Participants outside the U.S. include Japan Telecom, France Telecom, and Deutsche Telekom. The latter two have seen their credit quality deteriorate since 2001. On the whole, the credit quality of the carriers was no longer consistent with a Baa1' rating, Corcino said. A number of the carriers are junk rated. In a report dated last March, Telefonica Argentina has boosted its share of settlement payment to nearly one quarter of the total. That company is rated Ca'.

The deal is also fraying on its domestic flank. Cheaper alternatives to international phone calls, such as Internet usage and pre-paid calling cards, have chipped away at the business. Telefonica de Peru has not been immune to the trend. According to Moody's, the per-minute settlement rate of the cash flowing into the trust shrank to US$0.10 in June 2003 from US$0.46 in December 1998.

The repercussions for other Latin American deals covered by Moody's are nil, Corcino said. "There aren't other deal we've rated" in this asset class, he added.

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