October 26, 2010 |
|Fitch Ratings-London/Moscow-26 October 2010: Fitch Ratings has upgraded OJSC Tattelecom's Long-term foreign currency Issuer Default Rating (IDR) and senior unsecured foreign currency rating to 'BB-' from ' B+', respectively. Fitch has also affirmed Tattelecom's Short-term foreign currency IDR at 'B'. The Outlook for the Long-term foreign currency IDR is Stable.|
The upgrade reflects Tattelecom's decreased refinancing risks and leverage. The company managed to reduce its short-term debt to 31% of total debt at end-Q310 from above 60% at end-Q309 and the remaining maturities are evenly distributed by year until end-2013. Tattelecom's funds from operations (FFO) adjusted net leverage will likely decrease to below 1.5x at end-2010 from 1.7x at end-2009 (down from 1.9x at end-2008), due to significantly reduced debt. This leverage would be close to Tattelecom's higher-rated Russian peers. A modest 12% of total debt is foreign currency-denominated.
The ratings factor in Tattelecom's strong operating performance and resilient EBITDA generation during the economic downturn. Its EBITDA margin, adjusted for a one-off release of RUB142m provisions for bad receivables, rose to 41.7% at end-2009 from 39.9% at end-2008 due to reduced costs. Fitch expects this margin to increase to above 42% at end-2010 due to rapid revenue growth (above 10%) driven by broadband, and backed by continuing cost control.
In 2009, Tattelecom's free cash flow (FCF) improved due to capex reduction. However, it remained negative, suppressed by significant negative changes in working capital (reduced payables and deferred income), which are unlikely to recur. FCF would have been positive if adjusted for a one-off purchase of financial assets of RUB330m. Fitch expects FCF to be strongly positive in 2010 and beyond, with the margin largely depending on capex.
Tattelecom's ratings are supported by its strong market position in the fixed-line voice segment (72% by line at end-2009) in the Republic of Tatarstan ('BBB-'/Stable) within the Russian Federation ('BBB'/Positive). Due to the company's extensive "last-mile" network, its market share is likely to remain unrivalled in the medium term, in the absence of local-loop unbundling (LLU) regulation.
Tattelecom is a leader in the regional broadband market, with a 44% residential market share by line, compared with the 30% and 14% of its two closest competitors. The incumbent will likely continue capturing broadband market growth and maintain a solid market share due to its presence in areas not covered by alternative operators' networks, extensive coverage of potential residential subscribers with its ADSL-based offers, and bundling opportunities not available to many competitors. Fitch believes that Tattelecom may improve its competitive edge if it realises its planned roll-out of fibre network without delays.
At end-Q310, Tattelecom's liquidity was sufficient to cover its short-term debt, although it was supported mainly by the next 12 months' positive FCF forecast by Fitch, rather than cash and undrawn credit facilities. Tattelecom's liquidity management is moderately aggressive, as its cash balance is usually insignificant, and the company does not maintain large long-term undrawn credit facilities. Tattelecom prefers to procure new external funding, if needed to repay or refinance existing debt, closer to maturity (around three months before a due date). However, the company has substantial capex flexibility and may postpone part of its capex if necessary to support liquidity, without materially affecting its operating profile.
Tattelecom's ratings are suppressed by its small scale of business, which makes it potentially vulnerable to competition or acquisition by larger federal players, and limits the company's access to international debt markets.
Although 87.2% of Tattelecom is held by the Tatarstan government-controlled holding company OJSC Svyazinvestneftekhim (SINEK; 'BBB-'/Stable), it is rated on a standalone basis due to weak operational and financial ties with SINEK. However, Fitch considers it likely that SINEK would provide Tattelecom with liquidity or lobbying support if necessary.
|Full company name||Tattelecom|
|Country of risk||Russia|
|Country of registration||Russia|