March 11, 2014 / 2:50 PM / 4 years ago

Fitch Affirms OJSC Tattelecom at 'BB'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, March 11 (Fitch) Fitch Ratings has affirmed Russia-based OJSC Tattelecom's (Tattel) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB' and its Short-term IDR at 'B'. The Outlook on the Long-term IDR is Stable. The ratings reflect OJSC Tattelecom's well-established positions as a fixed-line incumbent in the Russian Republic of Tatarstan (BBB/Stable), with dominant shares in the traditional telephony market. It quickly became the largest broadband player in its operating territory, and made a successful entry into pay-TV. The company launched mobile service in 2013, diversifying its product portfolio. They also reflect the company's small scale and weak parental support. KEY RATING DRIVERS Strong Market Shares Tattel has been able to successfully defend and even expand its market shares, most notably to above 50% in the broadband segment, in spite of a congested competitive environment. We believe the company is likely to continue eroding its peers' market shares, capitalising on its strong-quality network and a dedicated regional focus. Tattel's established local clout and the lack of unbundling regulation in Russia have enabled the company to defend its market against its financially stronger and larger national peers. Mobile Service Strategically Logical Tattel's recent entry into the mobile segment is complimentary to its existing wire-line operations. Strategically, it enables the company to become the sole quad-play operator although the merits of a quad-play service in Russia remain untested. Infrastructure synergies with the existing network should make a rapid roll-out of mobile service cost-efficient. Equally, the fixed-line network's large throughput capacity will allow Tattel to offer its customers quality data services. Modest Leverage; Strong FCF We expect Tattel's leverage in 2013 to have remained largely unchanged from 2012's 0.8x net debt/EBITDA and 1.1x funds from operations (FFO) adjusted net leverage. A rapid mobile roll-out will require substantial capex and raise leverage. However, we expect FFO-adjusted net leverage to remain well below the downgrade trigger of 2.25x. A fiber upgrade project was completed in 2013, which should increase cash flows from the wire-line segment and pave the way for rapid deleveraging. Substantial mobile investments will help swiftly turn this segment EBITDA-positive, with positive implications for leverage. The company's dividend policy of paying 30% of net profit by Russian accounting standards and the management's track record of high capex efficiency will be supportive of deleveraging flexibility. Small Size a Hindrance The company's small size could limit its financial options. Even the smallest bond issue by Russian market standards creates a substantial bullet refinancing exposure on the company's balance sheet. Tattel has predominantly relied on bank financing, where size is less of an issue. Weak Parental Support Fitch considers operational and strategic ties between the company and its controlling shareholder OJSC Svyazinvestneftekhim (SINEK, BBB/Stable) as weak. Tattel's rating therefore primarily reflects its standalone credit profile. However, it is likely that SINEK would provide liquidity or lobbying support, if necessary. RATING SENSITIVITIES A downgrade could be triggered by a rise in leverage to above 2.25x FFO adjusted net leverage on a sustained basis. Tight liquidity and cash flow pressures driven by revenue and market share losses, particularly in the broadband segment, may also be negative for the ratings. Rating upside is constrained by the small size of the company, its lack of geographical diversification, and limited access to capital markets. Contact: Principal Analyst Slava Bunkov Associate Director +7 495 956 9931 Supervisory Analyst Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Committee Chair Stuart Reid Senior Director +44 20 3530 1085 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 05 August 2013, are available at Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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