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Feb 26 (The following statement was released by the rating agency)
Fitch Ratings has revised the Outlook on Sistema Joint Stock Financial Corp.'s (Sistema) 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 significant deleveraging at the holdco level and expectations of continuing stable dividends from key subsidiaries, which should be sufficient to resolve legacy support issues for weaker parts of the group.
Sistema is a diversified holding company with its key assets being controlling stakes in OJSC Mobile TeleSystems (MTS; BB+/Positive), a large telecoms operator in Russia and CIS, and Joint Stock Oil Company Bashneft (Bashneft; BB/Positive), a medium-sized Rissian oil company. Sistema's credit profile is shaped by its ability to control cash flows and extract dividends from these two key subsidiaries. These positives are overlaid by a significant debt burden at the holdco level including exposure to substantial off-balance-sheet liabilities through its subsidiaries and potential support requirements for weaker assets of the group.
KEY RATING DRIVERS
Reliable Dividend Flow
Sistema's key operating subsidiaries, MTS and Bashneft generate strong free cash flow (FCF) supporting their ability to pay large dividends. Sistema can effectively control the cash flows of these subsidiaries and shape their dividend policy.
Additional Dividends an Option
In view of both MTS's and Bashneft's low leverage and stable operating performance, they retain flexibility to upstream significant additional dividends without jeopardising their ratings. On a standalone basis, MTS's credit profile is consistent with low investment grade level. We estimate that Sistema may extract up to USD4bn in extra dividends, which would be sufficient to address any debt issues at the holdco level and provide necessary financial support to its weaker subsidiaries.
Focus on Dividends, Monetisation
Sistema adopted a new strategy in 2013, which aims to transform the company into a diversified investment holding company, with a focus on receiving stable dividends and monetising its investments and less emphasis on operating control. However, we note that material dividend diversification may only be achievable in the long term, and expect that Sistema will continue to depend on dividends from MTS and Bashneft as a key recurring income stream in the short to medium term at least.
Diversification benefits will likely come at a price of lower control over the investments' cash flows if Sistema's portfolio composition changes to minority stakes. As an investment holding company, Sistema will remain intrinsically exposed to high M&A risks.
Off-Balance-Sheet Exposure Reduced
Sistema guarantees some debt of its subsidiaries, most notably Sistema Shyam TeleServices (SSTL) in India. On a positive note, this subsidiary's debt had significantly reduced to USD621m at end-September 2013 from USD1,574m at end-2011with Sistema's help. SSTL significantly downsized its operations and scaled down its development ambitions in India with the aim of becoming EBITDA break-even by 1Q15. We believe this will limit the amount of additional support required from Sistema.
The holdco also granted a number of equity put options, which effectively turn these instruments into debt recourse to Sistema, increasing its leverage.
Weak Developing Assets
Some of Sistema's operating subsidiaries are fairly weak credits, and some are highly leveraged, most importantly in the high-tech segment, and may require financial support from the parent. Although Sistema is not contractually committed to provide this support, additional reputational/strategic considerations may apply.
Holdco Leverage Improving
A sale of the minority 49% stake in Russneft for USD 1.2bn in 2013 allowed Sistema to notably delever at the holdco level. We expect that dividends from MTS and Bashneft will be sufficient to gradually reduce off-balance sheet liabilities and sort out legacy support requirements for weak subsidiaries.
A reduction in off-balance-sheet liabilities and sustained deleveraging at the holdco level to below 2.5x net debt including off-balance-sheet liabilities to normalised dividends may be positive. This is likely to be achieved through limiting Sistema's exposure to further losses and debt increases at Shyam and re-organisation of the technology segment so that it becomes capable of sustainably servicing its debt without parental support.
A protracted rise in this metric to above 4.5x may lead to negative rating action. A portfolio reshuffle increasing the share of subsidiaries with low credit profiles could also be rating negative.
FULL LIST OF RATING ACTIONS
Long-Term IDR: affirmed at 'BB-', Outlook revised to Positive from Stable Local currency Long-Term IDR: affirmed at 'BB-, Outlook revised to Positive from Stable
National Long-Term Rating: affirmed at 'A+(rus)', Outlook revised to Positive from 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-'