March 12, 2014 |
|Fitch Ratings has affirmed Russia-based OJSC Tattelecom's (Tattel) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB' and its Short-term IDR at 'B'. The Outlook on the Long-term IDR is Stable.|
The ratings reflect OJSC Tattelecom's well-established positions as a fixed-line incumbent in the Russian Republic of Tatarstan (BBB/Stable), with dominant shares in the traditional telephony market. It quickly became the largest broadband player in its operating territory, and made a successful entry into pay-TV. The company launched mobile service in 2013, diversifying its product portfolio. They also reflect the company's small scale and weak parental support.
KEY RATING DRIVERS
Strong Market Shares
Tattel has been able to successfully defend and even expand its market shares, most notably to above 50% in the broadband segment, in spite of a congested competitive environment. We believe the company is likely to continue eroding its peers' market shares, capitalising on its strong-quality network and a dedicated regional focus.
Tattel's established local clout and the lack of unbundling regulation in Russia have enabled the company to defend its market against its financially stronger and larger national peers.
Mobile Service Strategically Logical
Tattel's recent entry into the mobile segment is complimentary to its existing wire-line operations. Strategically, it enables the company to become the sole quad-play operator although the merits of a quad-play service in Russia remain untested. Infrastructure synergies with the existing network should make a rapid roll-out of mobile service cost-efficient. Equally, the fixed-line network's large throughput capacity will allow Tattel to offer its customers quality data services.
Modest Leverage; Strong FCF
We expect Tattel's leverage in 2013 to have remained largely unchanged from 2012's 0.8x net debt/EBITDA and 1.1x funds from operations (FFO) adjusted net leverage. A rapid mobile roll-out will require substantial capex and raise leverage. However, we expect FFO-adjusted net leverage to remain well below the downgrade trigger of 2.25x.
A fiber upgrade project was completed in 2013, which should increase cash flows from the wire-line segment and pave the way for rapid deleveraging. Substantial mobile investments will help swiftly turn this segment EBITDA-positive, with positive implications for leverage. The company's dividend policy of paying 30% of net profit by Russian accounting standards and the management's track record of high capex efficiency will be supportive of deleveraging flexibility.
Small Size a Hindrance
The company's small size could limit its financial options. Even the smallest bond issue by Russian market standards creates a substantial bullet refinancing exposure on the company's balance sheet. Tattel has predominantly relied on bank financing, where size is less of an issue.
Weak Parental Support
Fitch considers operational and strategic ties between the company and its controlling shareholder OJSC Svyazinvestneftekhim (SINEK, BBB/Stable) as weak. Tattel's rating therefore primarily reflects its standalone credit profile. However, it is likely that SINEK would provide liquidity or lobbying support, if necessary.
A downgrade could be triggered by a rise in leverage to above 2.25x FFO adjusted net leverage on a sustained basis. Tight liquidity and cash flow pressures driven by revenue and market share losses, particularly in the broadband segment, may also be negative for the ratings.
Rating upside is constrained by the small size of the company, its lack of geographical diversification, and limited access to capital markets.
|Full company name||Tattelecom|
|Country of risk||Russia|
|Country of registration||Russia|