Dec 05 - Fitch Ratings has affirmed OJSC Mobile Telesystems's
Long-Term Issuer Default Rating (IDR) at 'BB+'. The Outlook is Stable. A full
list of rating actions is provided at the end of this release.
On a stand-alone basis MTS's credit profile conforms to low investment grade. It
is an established mobile operator with strong margins and free cash flow (FCF)
generation and modest leverage. However, MTS has limited geographic
diversification within CIS with high reliance on the Russian market. MTS's
ratings are notched down for the negative influence of Joint Stock Financial
Corp. Sistema ('BB-'/Stable), MTS's majority shareholder.
- Stable Market Shares:
MTS holds strong and reasonably stable market shares in all its key mobile
markets - including, and most importantly, Russia. Fitch believes MTS will
continue to successfully defend its positions and maintain broad parity with
peers in terms of network coverage and technology solutions.
- Mature Markets, Rising Competition:
However, key Russian and Ukrainian mobile markets are mature and competitive
pressures may intensify further in light of the market-share ambitions of Tele2
and Rostelecom in the medium term.
- Robust FCF Generation: MTS sustainably generates positive FCF and overall
financial performance is robust. Capex as a percentage of revenue has been high
- well above 20% - inflated by 3G spend in Russia. Fitch expects this ratio to
drop in the medium-to-long term but stabilise at a higher level than at European
peers, due to lower average revenue per user (ARPU).
- Margin Resilience Likely.
Reduced dealer commission fees and no handset subsidisation in Russia should be
supporting margins. MTS managed to successfully change it relationships with
dealers whereby the operator switched from paying a fixed fee to a revenue
sharing model. The latter incentivises dealers to sign up quality subscribers
with positive implications for churn but also protects MTS from paying excessive
-Sufficient LTE spectrum:
MTS has sufficient LTE spectrum to successfully compete in Russia. The company
was one of the four winners in the all-Russia LTE spectrum auction in July 2012.
In addition, MTS has ready-for-use 2.6GHz spectrum in the most lucrative Moscow
- Modest Leverage:
MTS's leverage has been modest at below 1.5x net debt/EBITDA and organic
development, including LTE roll-out in Russia, can be financed with internally
generated cash flows. Fitch estimates that a recent decision to increase
dividend payments will not jeopardise leverage. However, the company is not
committed to a public leverage target.
- Negative Sistema Influence: Fitch regards MTS's exposure to the group-wide
risks of Sistema, and the holding company's flexibility to significantly
increase MTS's leverage, if need be, as significant credit constraints. Under
Fitch's parent-subsidiary methodology, the subsidiary's rating may be a maximum
of two notches higher than that of the parent.
- Sufficient Liquidity:
MTS's debt maturity profile is well spread, with single-year refinancing
exposure below USD800m a year until 2015 (as of end-Q312). Currency risks are
moderate, with the FX share of the total debt portfolio reported at 24% at
RATING SENSITIVITY GUIDANCE:
Shareholder Influence: Positive rating changes at Sistema, or higher ring-fence
around MTS limiting Sistema's influence such as corporate governance mechanisms
or legal provisions will likely lead to a positive rating action.
Leverage, FCF: A downgrade may arise from increased shareholder remuneration,
MTS's acquisition of Sistema group assets, or a build-up in pressure to upstream
cash due to funding needs at the wider Sistema group - and a consequent rise in
funds from operations adjusted net leverage to above 3x. 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 Stable
Short Term IDR: Affirmed at 'B'
Local Currency Long Term IDR: Affirmed at 'BB+, Outlook Stable
Local Currency Short Term IDR: Affirmed at 'B'
National Long-Term Rating: Affirmed at 'AA(rus)', Outlook 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+'