(The following statement was released by the rating agency)
Dec 11 -
Summary analysis -- OJSC Rostelecom ------------------------------- 11-Dec-2012
CREDIT RATING: BB+/Stable/-- Country: Russia
Primary SIC: Communications
Mult. CUSIP6: 77852T
Credit Rating History:
Local currency Foreign currency
13-May-2011 BB+/-- BB+/--
16-Dec-2008 BB/-- BB/--
The rating on Russian telecommunications operator OJSC Rostelecom is based on the company's
stand-alone credit profile, which Standard & Poor's Ratings Services assesses at 'bb', and
Standard & Poor's view that there is a "moderate" likelihood that the government of the Russian
Federation would provide timely and sufficient extraordinary support if the company were to
encounter periods of financial distress.
We view Rostelecom's business risk profile as "fair" and financial risk profile as
"significant", as our criteria define these terms.
The business risk profile assessment is constrained by Rostelecom's weak position in mobile
telephony, where it currently operates as a distant No. 4 or 5 in the saturated, competitive
Russian market. These risks are only partly offset by Rostelecom's exclusive ownership of
nationwide fixed-line telecom infrastructure and resulting strong position in fixed-line
telephony and broadband.
The financial risk profile assessment is primarily limited by the limited predictability of
Rostelecom's strategy and financial policy, including, in our view, an increasing risk of
mergers and acquisitions and a meaningful increase in capital spending. It is also constrained
by our assessment that Rostelecom has "less-than-adequate", as the company still has significant
exposure to refinancing risk. Somewhat offsetting these risks are Rostelecom's currently
moderate debt leverage, robust cash generation of core fixed-line business, and ongoing support
from state banks.
In accordance with our criteria for government-related entities (GREs), our view of a
"moderate" likelihood of extraordinary government support is based on our assessment of
-- "Strong" link with the state, reflecting the state's majority ownership and an absence of
immediate plans to decrease its stake in the medium term; and
-- "Limited" importance for the government because we view the Russian telecom market as
quite mature and competitive, and Rostelecom could be replaced by other service providers.
S&P base-case operating scenario
In our base-case assessment, we assume that Rostelecom's annual percentage revenue growth in
2013 will slow to low single digits, due to saturation of the Russian broadband market and
intensifying competitive pressures in this segment. However, residual growth in the number of
broadband customers and increasing numbers of pay-TV subscribers should compensate for the
decline in revenues from traditional regulated fixed-line services, in particular, long-distance
and intrazonal telephony.
Generally, we do not expect Rostelecom's gross margins to decline because of competition.
However, we believe that the company's investments in its own unified brand and a single billing
system will put pressure on operating profitability. Consequently, we see a risk that its
reported EBITDA margin could decline to 35% over the next two-three years from the current 39%.
We assume that Rostelecom will seek to develop its mobile operations. Rostelecom was one of
the four operators that was awarded a nationwide 4G license. Also, based on the press reports,
the company is mulling over creation of a joint venture with Tele2 (not rated) for
this purpose. Although our forecast projects an increase in capital spending associated with the
network buildout, we do not expect that it could meaningfully improve our assessment of the
company's business profile over the next 12 months.
S&P base-case cash flow and capital-structure scenario
In our base-case assessment, we assume that Rostelecom's free cash flow generation in 2013
will be constrained by significant capital expenditures, which will likely exceed 20% of
revenues. We also assume that Rostelecom will continue to make acquisitions in both the mobile
and broadband segments that will constrain cash generation.
We assume that Rostelecom's debt will increase in 2013 as a result of such acquisitions,
capital spending, and dividends, but will stay below 2x its EBITDA. We also assume that
Rostelecom will gradually refinance its significant short-term debt, which it inherited from the
regional operators with which it merged in 2011.
We consider Rostelecom's liquidity to be "less than adequate", as defined in our criteria.
This reflects our assessment that its liquidity sources do not fully cover liquidity uses for
the next 12 months. The reason for this is the company's sizable short-term maturities of about
Russian ruble (RUB) 74 billion (about $2.3 billion), which it acquired as part of the mergers in
2011. The company is gradually refinancing its short-term maturities but they remain
significant, compared with the available sources of liquidity. However, Rostelecom claims to
have a meaningful amount of committed and uncommitted credit lines, which should cover the debt
repayments for at least six months. We expect that Rostelecom will gradually refinance its
short-term debt with medium-term debt instruments, which should improve its liquidity
In our liquidity assessment for Rostelecom we take into account the company's very strong
relationship with the largest state-owned banks, including Sberbank (not rated) and VTB
Bank JSC (BBB/Stable/A-3; Russia national scale 'ruAAA'), which suggests continued
access to the domestic credit markets. As long as Rostelecom's leverage is moderate and it
generates robust cash flows, we believe there is a high likelihood that state-owned banks will
roll over its maturing credit facilities.
The stable outlook reflects our expectation that Rostelecom's fixed-line business will
generate sufficient cash flows to finance its growth in other segments of the market, such as
broadband Internet. We also assume that Rostelecom's investments in restructuring its
operations, developing a nationwide brand, and unifying its billing system will be prudently
managed and will not lead to significant operating disruptions or increases in debt leverage. At
this rating level, we anticipate a ratio of debt to EBITDA of not meaningfully more than 2x. In
our base-case scenario, we assume that Rostelecom will continue to enjoy strong access to
funding from state-owned banks and improve its capital structure over the longer term.
A downgrade could result if Rostelecom were to implement a more aggressive financial policy,
for example fueled by mergers and acquisitions, that would lead to an increase of the adjusted
debt-to-EBITDA ratio, as calculated by Standard & Poor's, to more than 2.5x. We could also lower
the rating if Rostelecom were to maintain its current capital structure, characterized by
significant exposure to short-term debt, by not extending the average duration of its debt
maturities. A significant reduction in the state's shareholding in Rostelecom, for example as a
result of the ongoing reorganization of telecom holding Svyazinvest, could lead to a one-notch
In our view, an upgrade is unlikely over the next 12 months and would require a significant
improvement in Rostelecom's business risk profile, such as a meaningfully stronger market
position in mobile telephony and better operating efficiency.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008