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Fitch Puts Sistema, MTS on Rating Watch Negative
June 28, 2017 / 4:25 PM / 6 months ago

Fitch Puts Sistema, MTS on Rating Watch Negative

(The following statement was released by the rating agency) MOSCOW/LONDON, June 28 (Fitch) Fitch Ratings has placed Sistema Public Joint Stock Financial Corporation (Sistema) and PJSC Mobile TeleSystems (MTS) on Rating Watch Negative following a Russian court injunction to freeze significant Sistema assets including its 31.76% stake in MTS, in relation to claims filed by Rosneft against Sistema. 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) and currently a majority-controlled subsidiary of Rosneft, 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. The hearings on the substance of this case started on 27 June 2017. KEY RATING DRIVERS Significant Assets Affected: The court injunction and the subsequent bailiff's decision significantly limit Sistema's ability to control a sizeable portion of its assets, and may reduce the flow of dividends to the holding company. The watch is likely to be resolved when Fitch receives more clarity on the financial consequences of the litigation, and their implications for both Sistema and MTS. The freeze on shares does not pre-empt the court decision on the substance of the claims. The total amount of claims consists of a number of individual claims of smaller size, and the court is likely to make a decision on the merit and the size of each of the sub-claims. Worst Case Scenario: The worst case scenario for MTS will be for Sistema to exercise its majority shareholder rights to upstream significant additional distributions from MTS that may be necessary to cover Sistema's potential losses under this litigation. 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. Frozen Stakes: Sistema announced that its 31.76% equity interest in MTS (out of its owned 51% stake), 100% equity stake in Medsi and 90.47% equity interest in Bashkirian Power Grid Company were frozen by a decision of the arbitration court. In addition, bailiffs imposed additional restrictive measures prohibiting Sistema to receive any income on the frozen shares, including dividends. 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 substantial off-balance-sheet liabilities related to its subsidiaries. Efforts to diversify dividend inflows are likely to take time before providing a sustainable contribution. MTS's credit profile is supported by the company's position as a leading Russian and CIS mobile operator with moderate leverage and sustainable positive pre-dividend free cash flow (FCF) generation. It is the largest operator in Russia and the second-largest in Ukraine by subscriber and revenue. MTS's ratings are notched down to reflect the potential negative influence of its controlling shareholder Sistema. KEY ASSUMPTIONS The RWN is driven by the assumption that Sistema may incur losses from the litigation initiated by Rosneft. RATING SENSITIVITIES The RWN is likely to be resolved when there is more clarity on the financial consequences of the litigation with Rosneft, and their implications for both Sistema and MTS. Sistema: Sustained deleveraging at the holdco level to below 2.5x net debt, including off-balance-sheet liabilities to normalised dividends received from Sistema's operating subsidiaries, may be positive for Sistema's rating. A protracted rise in net debt including off-balance-sheet liabilities to normalised dividends to above 4.5x may lead to negative rating action. A portfolio reshuffle, increasing the share of subsidiaries with week credit profiles, could also be rating-negative. MTS: MTS's rating could benefit from an upgrade of Sistema's rating provided that MTS continues to adhere to high corporate governance standards. A downgrade could arise from weaker corporate governance but also excessive shareholder remuneration and other developments that lead to a sustained rise in funds from operations adjusted net leverage to above 3.0x. Competitive weaknesses and market-share erosion, leading to significant deterioration in pre-dividend FCF generation, may also become a negative rating factor. A downgrade of Sistema may also be negative if Sistema remains the dominant shareholder. FULL LIST OF RATING ACTIONS Sistema Joint Stock Financial Corp. Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs): 'BB-'; placed on RWN Senior unsecured debt: 'BB-'; placed on RWN Sistema International Funding S.A. Loan participation notes guaranteed by Sistema: 'BB-'; placed on RWN PJSC Mobile Telesystems' (MTS) Long-Term Foreign and Local Currency IDRs: 'BB+'; placed on RWN Short-Term Foreign and Local Currency IDR: 'B'; placed on RWN Senior local and foreign currency unsecured debt: 'BB+'; placed on RWN MTS International Funding Ltd Loan participation notes guaranteed by MTS: 'BB+'; placed on RWN Contact: Principal Analyst Slava Bunkov 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 Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@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 Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Rating Investment Holding Companies (pub. 13 Jan 2017) here Additional Disclosures Solicitation Status here#solicitation 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. 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