TEXT-Fitch affirms MTS at 'BB+'; Outlook Stable
Dec 05 - Fitch Ratings has affirmed OJSC Mobile Telesystems's 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.
On a stand-alone basis MTS's credit profile conforms to low investment grade. It is an established mobile operator with strong margins and free cash flow (FCF) generation and modest leverage. However, MTS has limited geographic diversification within CIS with high reliance on the Russian market. MTS's ratings are notched down for the negative influence of Joint Stock Financial Corp. Sistema ('BB-'/Stable), MTS's majority shareholder.
- Stable Market Shares:
MTS holds strong and reasonably stable market shares in all its key mobile markets - including, and most importantly, Russia. Fitch believes MTS will continue to successfully defend its positions and maintain broad parity with peers in terms of network coverage and technology solutions.
- Mature Markets, Rising Competition:
However, key Russian and Ukrainian mobile markets are mature and competitive pressures may intensify further in light of the market-share ambitions of Tele2 and Rostelecom in the medium term.
- Robust FCF Generation: MTS sustainably generates positive FCF and overall financial performance is robust. Capex as a percentage of revenue has been high - well above 20% - inflated by 3G spend in Russia. Fitch expects this ratio to drop in the medium-to-long term but stabilise at a higher level than at European peers, due to lower average revenue per user (ARPU).
- Margin Resilience Likely.
Reduced dealer commission fees and no handset subsidisation in Russia should be supporting margins. MTS managed to successfully change it relationships with dealers whereby the operator switched from paying a fixed fee to a revenue sharing model. The latter incentivises dealers to sign up quality subscribers with positive implications for churn but also protects MTS from paying excessive dealer commissions.
-Sufficient LTE spectrum:
MTS has sufficient LTE spectrum to successfully compete in Russia. The company was one of the four winners in the all-Russia LTE spectrum auction in July 2012. In addition, MTS has ready-for-use 2.6GHz spectrum in the most lucrative Moscow market.
- Modest Leverage:
MTS's leverage has been modest at below 1.5x net debt/EBITDA and organic development, including LTE roll-out in Russia, can be financed with internally generated cash flows. Fitch estimates that a recent decision to increase dividend payments will not jeopardise leverage. However, the company is not committed to a public leverage target.
- Negative Sistema Influence: Fitch regards MTS's exposure to the group-wide risks of Sistema, and the holding company's flexibility to significantly increase MTS's leverage, if need be, as significant credit constraints. Under Fitch's parent-subsidiary methodology, the subsidiary's rating may be a maximum of two notches higher than that of the parent.
- Sufficient Liquidity:
MTS's debt maturity profile is well spread, with single-year refinancing exposure below USD800m a year until 2015 (as of end-Q312). Currency risks are moderate, with the FX share of the total debt portfolio reported at 24% at end-Q312.
RATING SENSITIVITY GUIDANCE:
Shareholder Influence: Positive rating changes at Sistema, or higher ring-fence around MTS limiting Sistema's influence such as corporate governance mechanisms or legal provisions will likely lead to a positive rating action.
Leverage, FCF: A downgrade may arise from increased shareholder remuneration, MTS's acquisition of Sistema group assets, or a build-up in pressure to upstream cash due to funding needs at the wider Sistema group - and a consequent rise in funds from operations adjusted net leverage to above 3x. Competitive weaknesses and market-share erosion, leading to significant deterioration in pre-dividend FCF generation, may also become a negative rating factor.
FULL LIST OF RATING ACTIONS
Long Term IDR: Affirmed at 'BB+', Outlook Stable
Short Term IDR: Affirmed at 'B'
Local Currency Long Term IDR: Affirmed at 'BB+, Outlook Stable
Local Currency Short Term IDR: Affirmed at 'B'
National Long-Term Rating: Affirmed at 'AA(rus)', Outlook Stable
Senior Unsecured Debt: Affirmed at 'BB+' foreign and local currency, 'AA(rus)'.
Loan Participation Notes issued by MTS International Funding Ltd and guaranteed by MTS: Affirmed at 'BB+'