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(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 shareholder.
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.