TEXT - Fitch affirms Sistema 'BB-' rating

Tue Dec 4, 2012 12:01pm EST

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(The following statement was released by the rating agency)
    Dec 4 - Fitch Ratings has affirmed Sistema Joint Stock Financial Corp.'s
(Sistema) Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable.
A full list of rating actions is provided at the end of this release. 

Sistema ratings continue to be supported by the solid operating and financial 
performance of its two largest subsidiaries, OJSC Mobile TeleSystems (MTS) 
('BB+'/Stable) and Joint Stock Oil Company Bashneft (Bashneft, 'BB'/Stable). As 
a majority shareholder, Sistema retains a flexibility to shape shareholder 
remuneration at these companies and can exert significant influence over their 
cash flows which makes distributions from these entities visible and reliable. 
However, leverage at the holdco level remains high, and the asset portfolio is 
likely to be under active review over the next couple of years exposing Sistema 
to elevated M&A risks.

- Strong Key Subsidiaries: 

Sistema's key operating subsidiaries, MTS and Bashneft, generate strong free 
cash flow (FCF), with an ability to pay large dividends, and are the key 
contributors to Sistema's credit profile. Sistema can exert significant 
influence over its subsidiaries' cash flows  and retains a flexibility to shape 
their dividend policy. 

MTS's leverage remains relatively low, with reported net debt/adjusted 
last-12-months EBITDA at 1.2x at end-Q312. Sistema retains a flexibility to 
significantly increase shareholder remuneration from MTS without jeopardising 
its ratings. The oil and gas segment is much more cyclical than telecoms, and 
Bashneft is only a medium-sized player in Russia. It faces substantial capex 
requirements in connection with the Trebs-Titov oil field development, which 
reduces its flexibility to support additional leverage and makes its shareholder
remuneration payments more volatile. However, Fitch expects the company to be 
able to continue paying sizeable dividends to Sistema. 

- Weak Developing Assets:

All Sistema's "developing assets" are fairly weak credits, and some are highly 
leveraged, most notably Sitronics JSC ('B-'/Negative). Sistema is only likely to
provide support to its subsidiaries as long as it sees positive equity value in 
these investments, but additional reputational/strategic considerations may 
apply. 

- Off-Balance-Sheet Exposure: 

Sistema's holding company (holdco) guarantees some of its subsidiaries' debt, 
most notably Sistema Shyam TeleServices (SSTL). The holdco also granted a number
of put options to some equity investors in its operating companies, which 
effectively turns their equity stakes into debt recourse to Sistema. These 
obligations significantly increase the holdco's effective leverage and exposure 
to refinancing risks. 

- Diversification Efforts Jeopardise Leverage: 

Sistema's plans to create a third stable business 'leg' within the group may 
trigger a substantial leverage increase at the holdco level. Sistema announced 
its strategic ambitions to become a controlling shareholder in a large company, 
likely in transportation or logistics segment. This may require a number of 
holdco financed acquisitions to accumulate a desired size which may drive an 
increase in the amount of debt and leverage at the holdco level. The ultimate 
impact would depend on Sistema's ability to find partners willing to financially
support these investments and the amount of debt that the holdco would be able 
to push down to the subsidiary level. However, the latter option would not be 
available for investments into minority stakes or entities where Sistema does 
not have full control over cash flows such as joint ventures. 

- Strong Cash Movement Ability: 

As a majority shareholder, Sistema can exercise discretion over the amount of 
dividends from MTS and Bashneft. However, its flexibility to sell assets to 
publicly listed MTS has become much more limited. 

- High M&A Risks: 

As an investment holding company, Sistema is intrinsically exposed to high M&A 
risks. These somewhat increased in 2012 as Sistema flagged its potential 
interest to a number of deals in various industries. M&A risks are somewhat 
mitigated by its effective status as custodian of strategic assets. Sistema is 
likely to continue developing assets considered strategically important in the 
domestic context, such as high tech.

RATING SENSITIVITY GUIDANCE:

Holdco Leverage, Opco Fundamentals: Reduction in the off-balance-sheet 
liabilities and deleveraging at the holdco level to net debt including 
off-balance-sheet obligations to normalised dividends to below 2.5x on a 
sustained basis could lead to an upgrade. A sustained rise in the ratio of net 
debt including off-balance-sheet obligations to normalised dividends to above 
4.3x could lead to a downgrade. A portfolio reshuffle increasing the share of 
subsidiaries with a low credit profile may also be ratings negative.

FULL LIST OF RATING ACTIONS

Long-Term IDR: Affirmed at 'BB-', Outlook Stable
Local Currency Long-Term IDR: Affirmed at 'BB-, Outlook Stable
National Long-Term Rating: Affirmed at 'A+(rus)', Outlook Stable
Senior Unsecured Debt: Affirmed at 'BB-' foreign and local currency,  'A+(rus)'.
Loan Participation Notes issued by Sistema Funding S.A. and guaranteed by 
Sistema: Affirmed at 'BB-'

 (Caryn Trokie, New York Ratings Unit)
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