(The following statement was released by the rating agency)
Dec 4 - Fitch Ratings has affirmed Sistema Joint Stock Financial Corp.'s
(Sistema) 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.
Sistema ratings continue to be supported by the solid operating and financial
performance of its two largest subsidiaries, OJSC Mobile TeleSystems (MTS)
('BB+'/Stable) and Joint Stock Oil Company Bashneft (Bashneft, 'BB'/Stable). As
a majority shareholder, Sistema retains a flexibility to shape shareholder
remuneration at these companies and can exert significant influence over their
cash flows which makes distributions from these entities visible and reliable.
However, leverage at the holdco level remains high, and the asset portfolio is
likely to be under active review over the next couple of years exposing Sistema
to elevated M&A risks.
- Strong Key Subsidiaries:
Sistema's key operating subsidiaries, MTS and Bashneft, generate strong free
cash flow (FCF), with an ability to pay large dividends, and are the key
contributors to Sistema's credit profile. Sistema can exert significant
influence over its subsidiaries' cash flows and retains a flexibility to shape
their dividend policy.
MTS's leverage remains relatively low, with reported net debt/adjusted
last-12-months EBITDA at 1.2x at end-Q312. Sistema retains a flexibility to
significantly increase shareholder remuneration from MTS without jeopardising
its ratings. The oil and gas segment is much more cyclical than telecoms, and
Bashneft is only a medium-sized player in Russia. It faces substantial capex
requirements in connection with the Trebs-Titov oil field development, which
reduces its flexibility to support additional leverage and makes its shareholder
remuneration payments more volatile. However, Fitch expects the company to be
able to continue paying sizeable dividends to Sistema.
- Weak Developing Assets:
All Sistema's "developing assets" are fairly weak credits, and some are highly
leveraged, most notably Sitronics JSC ('B-'/Negative). Sistema is only likely to
provide support to its subsidiaries as long as it sees positive equity value in
these investments, but additional reputational/strategic considerations may
- Off-Balance-Sheet Exposure:
Sistema's holding company (holdco) guarantees some of its subsidiaries' debt,
most notably Sistema Shyam TeleServices (SSTL). The holdco also granted a number
of put options to some equity investors in its operating companies, which
effectively turns their equity stakes into debt recourse to Sistema. These
obligations significantly increase the holdco's effective leverage and exposure
to refinancing risks.
- Diversification Efforts Jeopardise Leverage:
Sistema's plans to create a third stable business 'leg' within the group may
trigger a substantial leverage increase at the holdco level. Sistema announced
its strategic ambitions to become a controlling shareholder in a large company,
likely in transportation or logistics segment. This may require a number of
holdco financed acquisitions to accumulate a desired size which may drive an
increase in the amount of debt and leverage at the holdco level. The ultimate
impact would depend on Sistema's ability to find partners willing to financially
support these investments and the amount of debt that the holdco would be able
to push down to the subsidiary level. However, the latter option would not be
available for investments into minority stakes or entities where Sistema does
not have full control over cash flows such as joint ventures.
- Strong Cash Movement Ability:
As a majority shareholder, Sistema can exercise discretion over the amount of
dividends from MTS and Bashneft. However, its flexibility to sell assets to
publicly listed MTS has become much more limited.
- High M&A Risks:
As an investment holding company, Sistema is intrinsically exposed to high M&A
risks. These somewhat increased in 2012 as Sistema flagged its potential
interest to a number of deals in various industries. M&A risks are somewhat
mitigated by its effective status as custodian of strategic assets. Sistema is
likely to continue developing assets considered strategically important in the
domestic context, such as high tech.
RATING SENSITIVITY GUIDANCE:
Holdco Leverage, Opco Fundamentals: Reduction in the off-balance-sheet
liabilities and deleveraging at the holdco level to net debt including
off-balance-sheet obligations to normalised dividends to below 2.5x on a
sustained basis could lead to an upgrade. A sustained rise in the ratio of net
debt including off-balance-sheet obligations to normalised dividends to above
4.3x could lead to a downgrade. A portfolio reshuffle increasing the share of
subsidiaries with a low credit profile may also be ratings negative.
FULL LIST OF RATING ACTIONS
Long-Term IDR: Affirmed at 'BB-', Outlook Stable
Local Currency Long-Term IDR: Affirmed at 'BB-, Outlook Stable
National Long-Term Rating: Affirmed at 'A+(rus)', Outlook 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-'
(Caryn Trokie, New York Ratings Unit)