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RPT-Fitch Revises MTS's Outlook to Positive, Affirms at 'BB+'
February 26, 2014 / 2:10 PM / 3 years ago

RPT-Fitch Revises MTS's Outlook to Positive, Affirms at 'BB+'

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Feb 26 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has revised the Outlook on OJSC Mobile Telesystems' (MTS) Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB+'. A full list of rating actions is at the end of this release.

The revision of the Outlook reflects the revision of the Outlook on JSFC Sistema (BB-/Positive), MTS's controlling shareholder (see 'Fitch Revises Sistema's Outlook To Positive, Affirms at 'BB-'' dated 26 February 2014 at www.fitchratings.com). MTS is a leading Russian and CIS mobile operator with modest leverage and strong free cash flow generation. It is the largest operator in Russia and the second-largest in Ukraine by subscribers.

KEY RATING DRIVERS

Fundamentals Overlaid by Shareholding On a standalone basis, MTS's credit profile is commensurate with a low investment grade rating. MTS's ratings are notched down for the negative influence of Sistema, MTS's majority shareholder. Under Fitch's methodology, a subsidiary can be generally rated maximum two notches above its parent if the parent-subsidiary linkage is weak.

Robust FCF Generation

MTS sustainably generates positive free cash flow (FCF). Capex as a percentage of revenue has been high (well above 20%) inflated by 3G, and more recently, long-term evolution (LTE) spending in Russia. Fitch expects this ratio to drop in the medium to long term, but stabilise at a higher level than MTS's European peers, due to lower average revenue per user (ARPU).

Sufficient LTE Spectrum

MTS has sufficient LTE spectrum to successfully compete in Russia. The introduction of technological neutrality regarding the use of radio spectrum in Russia will allow the re-farming 1,800 MHz frequencies, reducing a need for expensive clearance of 800MHz spectrum.

MNP Not A Threat

The introduction of mobile number portability (MNP) in Russia in 2014 is unlikely to put MTS in a disadvantaged position. We believe the hardest hit will be operators in the middle, with the lowest priced and market leaders including MTS potentially benefiting from the regulatory change.

Sluggish Growth Prospects

Key Russian and Ukrainian mobile markets are mature and unlikely to demonstrate further strong growth. We expect demand for faster data to remain strong but it will be a challenge to monetise it with all operators chasing heavy-data customers. Competition is likely to intensify in light of the market-share ambitions of Tele2 Russia Holdings AB (BB+/RWE) backed by mobile assets of Rostelecom (BBB-/Stable). However, we believe the impact of the new larger market player will only be felt from 2H15.

Modest Leverage

MTS's leverage has been moderate at below 1.5x net debt/EBITDA and 2.0x FFO adjusted net leverage. Organic development, including LTE roll-out in Russia, but also increased pay-outs under a dividend policy revised in November 2012 and updated in February 2014 should not jeopardise this.

Corporate Governance is Key

MTS has adhered to high standards of corporate governance with its strategy and all key transactions reviewed and approved with the involvement of independent directors. We note that Sistema's financial situation at the holdco level is improving, which reduces risks that it may leverage its control over MTS to extract excessive cash flows. High transparency on Sistema's financial situation and strategy and its rating level differentiate MTS from most other private telecom companies in Russia, where there is significantly less visibility of strategic plans and the financial agenda of their controlling shareholders.

RATING SENSITIVITIES

The ratings could benefit from an upgrade of Sistema provided that MTS continues to adhere to high corporate governance standards. A downgrade could arise from weaker corporate governance but also excessive shareholder remuneration and other developments that lead to a sustained rise in funds from operations adjusted net leverage to above 3.0x. 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 revised to Positive from Stable

Short-Term IDR: affirmed at 'B'

Local currency Long-Term IDR: affirmed at 'BB+, Outlook revised to Positive from Stable

Local currency Short-Term IDR: affirmed at 'B'

National Long-Term Rating: affirmed at 'AA(rus)', Outlook revised to Positive from 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+'

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