S&P Lowers National Scale Governance Score On MGTS To CGS-5.5
May 23, 2006
Standard & Poor's Governance Services said today it lowered its Russia national scale corporate governance score (CGS) on Moscow City Telephone Network (JSC) (MGTS) to 'CGS-5.5' from 'CGS-5.9' on shareholder rights concerns following the board's resolution to suspend dividend payments for 2005. The global scale CGS remains unchanged at 'CGS-5+'.
On May 16, 2006, MGTS' board issued a recommendation in advance of the annual general meeting (AGM) scheduled for June 17 to suspend dividend payments on both common and preferred stock. According to Russian law, preferred stock acquires voting power proportional to its share in charter capital if a certain minimum share of net income under Russian Accounting Standards (10% in MGTS' case) is not directed to dividend payment on such stock. The voting right remains effective until a dividend on preferred stock that conforms with the 10% guideline is declared. Although MGTS' net income under RAS rose by 476% to $310.6 million in 2005, 61% of this figure accounts for asset re-evaluation and is not backed by cash flows.
The decision to suspend dividends, initiated by the majority shareholder Comstar-UTS JSC, a subsidiary of Sistema (JSFC), was met by opposition from blockholder Svyazinvest OJSC. If preferred stock acquires voting rights, Svyazinvest’s voting share will be reduced to 23% from 28%; the current level allows it to veto certain decisions requiring a 75% supermajority approval.
“Although Sistema’s decision to suspend dividends may be in line with the long-term business interests of the company, this move represents a departure from the principles set out in MGTS' charter and dividend policy,” said Standard & Poor's governance analyst Oleg Shvyrkov. “We also note that specific concerns of the minority shareholders, including Svyazinvest, have not been addressed, which we assess as negative from a governance perspective.”
“Given the company's substantial investment needs, however, the board’s recommendation is not assessed negatively from a creditor's perspective,” added Standard & Poor’s credit analyst Rob Richards.
Standard & Poor's notes that this is a complex governance situation in which the various long- and short-term interests of particular stakeholders and the corporate entity differ.
The overall CGS on MGTS is the result of four component scores on the global and Russia national scales of 1 (low) to 10 (high). The global scale score is shown first below, and the Russia national scale score second:
-- Ownership structure and external influences
-- Shareholder rights and stakeholder relations
-- Transparency, disclosure, and audit
-- Board structure and effectiveness
Company — MGTS
Full namePublic Joint Stock Company Moscow City Telephone Network (MGTS)