Fitch Upgrades OAO Centertelecom to ‘B+’; Outlook Stable
April 10, 2009 "Fitch Ratings"
Fitch Ratings-London/Moscow-09 April 2009: Fitch Ratings has today upgraded Russia-based OAO Centertelecom’’s (CT) ratings to Long-term Issuer Default (IDR) ‘B+’ from ’B’ and National Long-term ‘A(rus)’ from ‘BBB(rus)’. The National senior unsecured rating was upgraded to ‘A(rus)’ from ’BBB(rus)’. Its Short-term IDR was affirmed at ‘B’. The Outlooks on the Long-term IDR and National Long-term rating are Stable.
“The fixed-line telecom business is likely to demonstrate strong resilience in the downturn which will support CT’s financial performance. Although refinancing risks remain a concern, the company is planning dramatic capex cuts and operating expenditure savings in 2009, which will boost free cash flow generation and help it manage any debt redemption calls,” says Nikolay Lukashevich, Senior Director in Fitch’s European TMT team.
Fitch notes that usage of both fixed line and mobile is unlikely to suffer significantly as a result of the economic crisis, particularly in the non-corporate segment. Although corporate revenues are under more pressure, this is mitigated by continuing broadband expansion and regulator-endorsed tariff increases on local services at slightly below the CPI inflation. The latest hike was in March this year at 8% on average. With no significant threats to revenues, margins will be supported by an ongoing cost-cutting programme.
In light of tight credit conditions, the company is cutting capex in 2009, and potentially keeping a tight control on it over the medium term with an aim to boost free cash flow generation. Prior high investments in the network and completion of the universal telecoms service (UTS) programme at end-2008 have allowed CT to be flexible on capex for at least two years, without negatively impacting growth prospects or competitiveness.
However, Fitch remains concerned with CT’s refinancing and liquidity risks. Although the company had only RUB461m of cash on its balance sheet at end-September 2008, since Q308 it has sought to preserve cash to meet any debt redemption calls. The largest short-term exposure is a RUB5.6bn domestic bond maturing in August 2009. These risks are mitigated by a low and declining leverage (with an estimated net debt/EBITDA at slightly above 1.7x at end-2008) and strong free cash flow generation in 2009 and possibly in 2010. Fitch notes that the management is strongly committed to extracting cash from its business to repay debt.
As a company under indirect government control and in a strategically important industry, CT benefits from special relationships with the largest state-controlled domestic banks, which improves the company’s refinancing prospects. In addition, CT continues to be funded by private banks, with Orgresbank (‘BBB+’, Negative Outlook) recently announcing a principal agreement to issue a EUR27m loan to the company.
The ratings also reflect CT’s dominant position as a regional incumbent fixed-line telecom operator with a diversified and stable subscriber base and control over the last-mile infrastructure. With competition primarily driven by the long-term transition to mobile technology from the fixed-line, the so far mild pressure from fixed-to-mobile substitution in the voice segment has been compensated by the company’s rapidly rising broadband market share and customer base. The regulatory environment remains benign for the entire fixed-line telecoms industry, including CT. The ratings also take into account the influence of 50.8% shareholder, Svyazinvest, on the decision-making process at CT and its potential lobbying support, although no direct cash support is expected for the company.
Company — Rostelecom - Center
Full nameRostelecom - Center