Fitch places LAN on rating watch negative and TAM on rating watch positive

In conjunction with this rating action, Fitch has placed TAM S.A.'s (TAM) following ratings on Rating Watch Positive:

--Local currency IDR at 'B+';

--Foreign currency IDR at 'B+';

--Long-term national scale rating at 'BBB+(bra)'.

--USD300 million senior unsecured note due to 2020 at 'B+/RR4';

--USD300 million senior unsecured note due 2017 at 'B+/RR4';

--BRL500 million debentures issuance due 2012 at 'BBB+(bra)'.

These rating actions follow the announcement by LAN and TAM that the two companies have reached an agreement to combine their holdings under a single parent entity. Fitch's rating action reflects the financial and operational impacts the transaction will have on the credit quality of each company after considering the combined financial profile of the two companies. The transaction would be subject to the approval from the regulatory authorities, as well as shareholder approvals from both companies.

The Transaction

Strategically, the combination of the companies is positive and provides a good opportunity for both companies to grow and take advantage of commercial, financial, and operational synergies. Based on LAN's management quality and successful business model, and TAM's solid market position in the Brazilian market, the fundamentals for this transaction are solid.

From a credit perspective, the transaction will have different impacts on each company's credit quality. Key factors in the process of stabilizing the credit profile of the combined company will be management's capacity to speed up expected synergies and integrate both companies in the near term; and the commitment that both economic groups, Cueto Group and Amaro Group, provide through tangible support and equity increases if needed, to maintain a solid credit profile.

Credit Quality Impact

LAN's cash generation, as measured by EBITDAR, has remained relatively stable during the last few years, at USD948 million, USD823 million and USD957 million during fiscal 2008, fiscal 2009 and the last 12 months (LTM) period ended June 2010, respectively. LAN's EBITDAR margin has consistently been over 22% during the last two years. The company had approximately USD3.7 billion in total debt at the end of June 2010. This debt consists primarily of USD3 billion of on-balance-sheet debt, most of which is secured, and an estimated USD663 million of off-balance-sheet debt associated with lease obligations. The company's leverage, as measured by net debt/EBITDAR, remained stable over the last few quarters at 3.2 times (x) at the end of June 2010.

TAM's cash generation, as measured by EBITDAR, has been trending negative during the last few years, as it was BRL1.5 billion, BRL 1.4 billion, and BRL1.3 billion during fiscal 2008, fiscal 2009 and the LTM period ended June 2010, respectively. TAM's EBITDAR margin has declined from 13.9% to 12.9% from fiscal 2008 to LTM June 2010. The company had approximately BRL 10.8 billion (USD6 billion) in total debt at the end of June 2010. This debt consists primarily of BRL7.7 billion (USD4.3 billion) of on-balance-sheet debt and an estimated BRL3.2 billion (USD1.8 million) of off-balance-sheet debt associated with lease obligations. The company's leverage, as measured by net debt/EBITDAR, deteriorated over the last few years to 6.5x at the end of June 2010 from 5.7x at the end of fiscal 2008.

On a pro forma basis, ending in June 2010, the combined company's EBITDAR would be around USD1.7 billion, with an estimated EBITDAR margin of 17.4%, net leverage would be around 4.7x, and liquidity, measured by cash and marketable securities/revenue ratio, would be approximately 19%.

A combined LAN and TAM would be the leader in the South America region with a solid network position. Further, the combined company will be the leader in the domestic market of Brazil, Chile, and Peru, and will consolidate its business position in the cargo segment.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com