October 30, 2017 / 4:23 PM / a year ago

Fitch Maintains Sistema on Rating Watch Negative

(The following statement was released by the rating agency) MOSCOW, October 30 (Fitch) Fitch Ratings has maintained Sistema Public Joint Stock Financial Corporation's (Sistema) ratings, including the Long-Term Issuer Default Rating (IDR) of 'BB-', on Rating Watch Negative (RWN) on uncertainty over the litigation with Rosneft. A full list of rating actions is at the end of this commentary. Rosneft filed claims against Sistema seeking RUB170.6 billion of damages for alleged abuse of Sistema's shareholding rights in PJSOC Bashneft (Bashneft) (BBB-/Stable), a medium-sized Russian oil company with legal registration in Russian Republic of Bashkortostan (BBB-/Stable), during the period when Sistema was the majority owner of Bashneft. The government of Bashkortstan, a shareholder in Bashneft, was accepted as the co-plaintiff. Bashneft is now a majority-controlled subsidiary of Rosneft, KEY RATING DRIVERS Litigation Impact: Fitch placed Sistema's ratings on RWN in June 2017 following a Russian court injunction to freeze significant assets in relation to claims filed by Rosneft against Sistema. These include 31.76% equity interest in PJSC Mobile TeleSystems (MTS) (BB+/RWN), 100% equity stake in Medsi and 90.47% equity interest in Bashkirian Power Grid Company. In addition, bailiffs imposed additional restrictive measures prohibiting Sistema to receive any income on the frozen shares, including dividends. In August the court ruled that Sistema should pay RUB136 billion of damages to Rosneft for alleged abuse of Sistema's shareholding rights in Bashneft. Sistema strongly believes that Rosneft's claims are without merit and filed the appeal against the ruling. The total amount of claims is significant and equal to more than 4.5x dividends received by Sistema in 2016 from its operating subsidiaries. If satisfied in full, the impact on the company's leverage and its ratings is likely to be negative. The RWN is likely to be resolved when Fitch gains more clarity on the financial consequences of the litigation with Rosneft, and their implications for both Sistema and MTS. DERIVATION SUMMARY Sistema's credit profile is primarily shaped by the company's ability to control cash flows and upstream dividends from MTS. This is overlaid by a significant debt burden at the holdco level, including exposure to off-balance-sheet liabilities. Efforts to diversify dividend inflows are likely to take time before providing a sustainable contribution. KEY ASSUMPTIONS The RWN is driven by the assumption that Sistema may incur losses from the litigation initiated by Rosneft. RATING SENSITIVITIES Positive: Future developments that may individually or collectively lead to positive rating action -Sustained deleveraging at the holdco level to net debt including off-balance-sheet liabilities-to-normalised dividends received from Sistema's operating subsidiaries of under 2.5x (2016: 3.4x). Negative: Future developments that may individually or collectively lead to negative rating action -A protracted rise in net debt including off-balance-sheet liabilities-to-normalised dividends to above 4.5x. -A portfolio reshuffle increasing the share of subsidiaries with weak credit profiles. LIQUIDITY Comfortable Liquidity Challenged: We view Sistema's liquidity as comfortable. Cash on the balance sheet at the holding company level (RUB36.2 billion at end-2Q17), combined with available long-term credit lines of RUB40 billion cover scheduled 2017-2018 debt maturities, including off-balance liabilities related to Sistema Shyam TeleServices. The court's decision on assets freeze, if sustained, limits Sistema's ability to control a sizeable portion of its assets, and may reduce the flow of dividends to the holding company. FULL LIST OF RATING ACTIONS Sistema Joint Stock Financial Corp Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs): 'BB-'; maintained on RWN Senior unsecured debt: 'BB-'; maintained on RWN Sistema International Funding S.A. Loan participation notes guaranteed by Sistema: 'BB-'; maintained on RWN Contact: Principal Analyst Irina Andrievskaya Associate Director +44 20 3530 1715 Supervisory Analyst Slava Bunkov Director +7 495 956 9931 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Committee Chairperson Tajesh Tailor Senior Director +44 20 3530 1726 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. 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 Criteria (pub. 07 Aug 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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