RPT-Fitch Revises Transtelecom's Outlook to Negative, Affirms at 'B+'
(Repeat for additional subscribers)
Dec 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has revised the Outlook on JSC Transtelecom Company's (TTK) to Negative from Stable and affirmed the company's Long-term Issuer Default Rating (IDR) at 'B+' and National Long-term rating at 'A-(rus)'. TTK's senior unsecured debt has been affirmed at 'B+'/'RR4' and domestic senior unsecured debt at 'A-(rus)'.
The revision of the Outlook reflects increased execution risks of the company's broadband strategy due to network roll-out delays vs. the earlier plan and on-going average revenue per user (ARPU) pressures. Leverage is rising, and even modest underperformance may push it above the downgrade trigger levels.
TTK operates a large-capacity fibre backbone network laid along Russian railways. It holds established positions in the inter-operator segment, and pursues a strategy of rapid broadband development. The company operates under an asset-light business model and depends on its shareholder for leasing core fibre network.
KEY RATING DRIVERS
Progress in the Broadband Segment But Execution Risks Remain High TTK has progressed with its strategy of diversifying into the fixed-line broadband segment. It plans to capitalise on the existing high capacity backbone infrastructure laid along Russian railways by building short network extensions to underpenetrated territories. TTK's ambition is to double its broadband subscriber base to 2.4m customers by end-2015 from 1.2m at end-September 2013. We expect the company to organically add close to 300,000 subscribers in 2013.
However, the company faces significant execution risks with its strategy. TTK will need to significantly increase new subscriber additions in 2014-2015 while keeping churn under control. Key operating threats are a lower penetration of covered households and a continuing fall in ARPUs. A rapid expansion of household coverage would require large capex, leading to a substantial increase in leverage.
Outperformance in the Shrinking Inter-Operator Segment
TTK has outperformed its competitors in a shrinking inter-operator wholesale market reporting market share gains and positive revenue growth. We expect some outperformance to continue in the short to medium term but it is not sustainable in the long run. Key telecoms players in Russia continue to invest into their own backbone networks, reducing opportunities for other network providers.
Relationship With Shareholder
Fitch rates TTK on a standalone basis. Legal ties are weak between TTK and its parent JSC Russian Railways (RZD; BBB/Stable) as the latter does not guarantee TTK's debt. Owning a telecoms company is not strategic for a railway operator. However, operating ties are strong and RZD is likely to retain control over TTK in the medium term. Any divestment plans are likely to be limited to selling a minority stake in the company.
TTK provides critical telecom and maintenance services to RZD. Replacing it as a core telecoms operator is not a feasible option for the railway monopoly, at least in the medium term.
Balancing High Capex and Leverage
Organic broadband development will continue to require substantial capex into new infrastructure build-out. The company faces the challenge of balancing investments with incremental broadband EBITDA growth, which is necessary to control leverage. We believe capex will largely be commercially driven, generating new revenues and EBITDA. This should help keep leverage at below 3x net debt/EBITDA and provide flexibility for deleveraging. The company is unlikely to aggressively cover new territories where it does not see strong demand for broadband services.
Cost Cutting and Profitability
Broadband roll-out requires significant one-off connection and distribution costs, which weigh on profitability. This segment's EBITDA margin will improve and its contribution grow as TTK's subscriber base expands and matures. We expect TTK to remain focused on cost efficiency, which will also help margins.
Liquidity Strained by Capex
At end-3Q13 TTK had sufficient liquidity to finance its 2013 capex and cover debt redemptions until end-2014. However, the company will need to raise additional debt to fund its 2014 capex programme.
Negative: Insufficient broadband growth and/or additional pressures in the inter-operator segment leading to a sustained rise in leverage to above 3.0x ND/EBITDA and 4.0x FFO adjusted net leverage without a clear path for deleveraging will likely lead to a downgrade.
Positive: Ratings may be stabilised if the company manages to the peak of its capex programme (likely in 2014) while controlling leverage and improving EBITDA generation from new broadband subscribers.
- Missing jet may have strayed toward Andaman Sea: Malaysian air force |
- NYC buildings explosion kills two, more missing
- Malaysia military source says missing jet veered to west |
- EU moves towards travel bans, asset freezes for Russians |
- Exclusive: EU approves framework for asset freezes, travel bans on Russia