October 10, 2012 |
|Fitch Ratings-London-10 October 2012: Fitch Ratings has affirmed OJSC Tattelecom's (Tattel) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB' and Short-term IDR at 'B'. The Outlook on the Long-term Issuer Default Rating is Stable.|
Tattel's ratings reflect its well-established positions of a regional fixed-line incumbent dominating in the traditional telephony and broadband segments, low leverage and robust free cash flow generation. However, the company's small size could potentially limit its financial flexibility. In addition, liquidity management is aggressive, exposing the company to short-term refinancing risks.
Tattel has been able to successfully defend and even grow its market shares, most notably in the broadband segment, despite the fierce competitive environment. Fitch believes that the company is likely to continue eating into its peers' market shares, capitalising on its good quality network and a dedicated regional focus. As a result, the company is facing positive revenue growth prospects, at least in the short to medium term.
Tattel improved its broadband market share by almost 5% yoy in 2011 adding more new customers than all other operators combined. The company launched IP-TV service at end-2009 and managed to seize a decent market share over a short-time span with good prospects for further progress in the pay TV segment.
Fibre upgrades should allow the company to stay ahead of the competition in terms of network quality. Tattel is rapidly rolling out fibre upgrades on its network aiming to cover all multi-storey residential houses by end-H113. The project investments have been moderate so far while yet to be incurred project costs are not expected by Fitch to drive a leverage spike.
Tattel's leverage was low at 1.0x ND/EBITDA and 1.3x FFO adjusted leverage at end 2011, and Fitch expects it to remain relatively modest. The company's dividend policy of paying 30% of net profit by Russian accounting standards and the management's focus on high capex efficiency (as measured by such benchmarks as capex per newly constructed line) will drive strong free cash flow generation and deleveraging flexibility.
Tattel's liquidity is insufficient to cover its 2013 debt maturities, which is a concern. No progress with finding sufficient liquidity sources to cover next year's maturities by early 2013 may prompt a negative rating action. Tattel's liquidity situation is mitigated by strong relationships with local banks, flexibility to reduce capex and increase cash flow from operations at short notice, and potential liquidity support from the company's controlling shareholder, OJSC Svyazinvestneftekhim (SINEK) ('BBB-'/Stable). Refinancing efforts will be helped by the company's overall low leverage and the fact that a potential liquidity gap is only a small fraction of the company's annual EBITDA.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- A rise in leverage to above 2.25x FFO adjusted net leverage
- Liquidity pressures
- Pronounced revenue pressures driven by market share losses, particularly in the broadband segment.
Positive: Further rating progress is restrained by the small size of the company's business, lack of geographical diversification, aggressive liquidity management and limited access to capital markets.
|Full company name||Tattelecom|
|Country of risk||Russia|
|Country of registration||Russia|