(Repeat for additional subscribers)
Feb 26 (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.
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.
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
Local currency Short-Term IDR: affirmed at 'B'
National Long-Term Rating: affirmed at 'AA(rus)', Outlook revised to Positive
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+'