May 30, 2013 / 2:17 PM / 4 years ago

Fitch Assigns MTS-Linked LPNs Final 'BB+' Rating

(The following statement was released by the rating agency) MOSCOW, May 30 (Fitch) Fitch Ratings has assigned MTS International Funding Limited's USD 500m due 2023 loan participation notes' (LPNs) a final 'BB+' rating on receipt of final documentation substantially conforming to information already received by Fitch. The LPN proceeds were on-lent to OJSC Mobile Telesystems (MTS) ('BB+'/Stable). LPNs are effectively structured as senior unsecured obligations of MTS. The agency also withdrew an expected rating on the Ruble tranche of the LPNs as the plans to issue this were scrapped. LPNs were issued by MTS International Funding Limited, an SPV domiciled in Ireland. The SPV is restricted in its ability to do business other than issue notes and provide loans (effectively, on-lend the proceeds) to MTS. LPNs are secured by a loan to MTS which ranks equally with other senior unsecured obligations of MTS. The loan contains a number of restrictive covenants including, inter alia, negative pledge, change of control clause, cross-default to other debt with a total limit of USD15m, limitation on assets sales, but no financial covenants. 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. KEY RATING DRIVERS - Stable Market Shares: MTS holds strong and reasonably stable market shares in all its key mobile markets - including, and most important, 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 support margins. MTS managed to successfully change its 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 dealer commissions. - 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 market. - 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 USD1 bn in each of 2013 and 2014. The 2015 refinancing peak of slightly above USD 2bn is equal to 0.4x of EBITDA and is manageable. Currency risks are moderate, with the FX share of the total debt portfolio reported at 24% at end-2012. RATING SENSITIVITIES 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. Contact: Principal Analyst Owen Fenton Assistant Director +44 203 30 1423 Supervisory Analyst Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Committee Chair Damien Chew Senior Director +44 20 3530 1424 Media Relations: 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 08 August 2012, are available at Applicable Criteria and Related Research: Corporate Rating Methodology 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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