(The following statement was released by the rating agency)
Dec 18 -
Summary analysis -- MegaFon OJSC ---------------------------------- 18-Dec-2012
CREDIT RATING: BBB-/Negative/-- Country: Russia
Primary SIC: Communications
Credit Rating History:
Local currency Foreign currency
21-Sep-2009 BBB-/-- BBB-/--
18-Dec-2007 BB+/-- BB+/--
The ratings on Russian telecoms operator MegaFon reflect Standard & Poor's
Ratings Services' assessment of the company's business risk profile as
"satisfactory" and financial risk profile as "intermediate," as our criteria
define the terms. MegaFon's business risk profile is primarily supported by
its robust positions on the Russian mobile telephone market, its strong
operating performance trend and sound cash flow generation. On the negative
side, MegaFon is exposed to intense competition in the mobile telephone market
as well as general country risks for corporates operating in Russia.
MegaFon's intermediate financial risk profile is supported by its moderate
debt leverage, strong free cash flow generation capacity, and adherence to a
conservative financial policy. The key weaknesses include the weaker credit
profile of its majority shareholder, which could potentially result in cash
outlays, therefore increasing leverage above our expectations.
S&P base-case operating scenario
In our base-case assessment we assume that MegaFon's revenues will increase
about 7% in 2012 and 5% in 2013 on the back of growth of the Russian telecoms
market. We assume that the company's previous investments in its 3G network
should continue to allow for slightly higher revenue growth compared with its
peers MTS and VimpelCom. That said, we do not expect any major changes in the
company's market share in next 12 months, while we assume a gradual increase
in scale of its fixed-line operations.
In our base-case assessment we assume that the profitability of Russian
telecoms operators could weaken due to competition and regulation. However, we
assume that MegaFon will manage to preserve its consolidated EBITDA margin at
above 40% in 2012 and 2013.
S&P base-case cash flow and capital structure scenario
In our base-case scenario we assume that following the completion of its IPO
on the London stock exchange in December 2012, MegaFon's ratio of adjusted
debt to EBITDA, as calculated by Standard & Poor's, has declined to about 1.6x
and will decline further to about 1.4x by the end of 2013 on the back of
positive free cash flow generation. We assume that despite the rollout of 4G,
MegaFon will generate free operating cash flow of at least Russian ruble
(RUB)30 billion in 2012 and 2013, which should allow for dividend distribution
and support modest deleveraging.
We also assume that MegaFon will implement robust corporate governance
practices. Notably, we assume that TeliaSonera together with independent
directors will obtain a majority on the board of directors, therefore
mitigating the risks of negative intervention from MegaFon's majority
We consider MegaFon's liquidity position to be adequate, on the basis of the
company's manageable debt maturity profile, robust free cash flow generation,
and availability of committed credit facilities for both general use and
capital expenditure financing. We calculate that the ratio of liquidity
sources to uses was about 1.3x at Sept. 30, 2012 and we expect it to remain at
similar levels during 2012 and 2013.
Our liquidity assessment is also based on the assumption that a certain part
of MegaFon's capital expenditure is discretionary and can be postponed in case
of liquidity pressure.
The negative outlook reflects the likelihood that we will lower the long-term
rating on MegaFon if we conclude that its corporate governance practices and
financial policies could weaken its credit quality. This might include a shift
from organic growth to aggressive acquisitions, significant or repeated
related-party transactions, or aggressive shareholder distributions.
In our base-case scenario, we assume that MegaFon will adhere to a
conservative financial policy and its leverage will decline gradually,
stabilizing at about 1.5x debt to EBITDA. However, if the company were to
increase leverage to above 2.0x, we would likely lower the rating. We do not
anticipate that ratings downside could stem from weakening in MegaFon's
operating performance, as that would require a very significant decline in
market share, coupled with deterioration of profitability to below 35%, none
of which we anticipate in the next 12 months.
We could revise the outlook to stable in the next 12-18 months if the company
demonstrates prudent financial management, maintains its adjusted leverage at
less than 1.5x debt to EBITDA, and implements corporate governance practices
that we would consider commensurate with an investment-grade rating.