DBRS Changes France Telecom SA Trend to Stable from Positive

Dominion Bond Rating Service (“DBRS”) has today changed the trend on the Senior Unsecured Notes and Bank Facilities of France Telecom SA (“FT” or the “Company”) to Stable from Positive while confirming the long-term rating at BBB (high). This downward change in trend reflects increasing technological and competitive pressures that have already impacted and will continue to affect FT’s revenue growth and resulting cash flow from operations. In response to these pressures, FT has announced that it will accelerate programs to simplify its brand portfolio and strengthen customer loyalty; these initiatives will come at the expense of pressuring EBITDA margins and restraining future growth in cash flow from operations. As a result, DBRS believes FT will be challenged in improving its credit metrics sufficiently over the next couple of years, especially its cash flow to gross debt ratio, to the level that is indicative of a telecom credit in the A (low) range that is typically at least 0.30 times.

DBRS noted in its press release of November 24, 2005, on FT’s ₤350 million debt issuance that it had several concerns relating to FT, including the prospect for more challenging revenue growth conditions in 2006. This was confirmed by FT yesterday, as the Company reduced pro forma revenue guidance from the previous target of between 3% and 5% to the new expectation of 2% pro forma revenue growth for 2006. Also, with competition now intensifying, resulting in higher customer acquisition/retention costs relating to both wireless and broadband, combined with the technological shift from circuit switched fixed line offerings to broadband, where margins are lower, FT revealed that EBITDA margins in 2006 will be negatively impacted. Given that the shift in technology and competitive pressures from other wireless and broadband operators may intensify over the medium term, DBRS believes that FT will likely face continued margin pressure with EBITDA margins remaining below 40% for the foreseeable future.

DBRS does acknowledge that FT will continue to generate substantial free cash flow, which is expected to be used partially to reduce gross debt as per FT’s management commitment. However, with FT’s management now also committed to improving shareholder compensation, either through potential future increases in dividends or share repurchases, DBRS believes that FT’s gross debt levels may not decrease as quickly as earlier projected when DBRS initiated the Positive trend on FT’s ratings in April 2005.

Finally, DBRS notes that FT’s rating remains solidly in the BBB (high) category, underpinned by its strong incumbent fixed line franchise in France, its large global mobility operations with dominant subscriber bases in France and the U.K., and FT’s excellent liquidity position augmented by the generation of substantial free cash flow.

Note: This rating is based on public information.