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S&P: Russian Fixed-Line Telco Central Telecommunications Raised To 'BB-/ruAA-'; Outlook Stable

November 3, 2009 Standard & Poor's
MOSCOW (Standard & Poor's) Nov. 2, 2009--Standard & Poor's Ratings Services said today that it had raised its long-term corporate credit rating on Russian regional telecommunications operator Central Telecommunications Co. (OJSC) (Central Telecom) to 'BB-' from 'B+'. The outlook is stable. At the same time, the national scale rating on Central Telecom was raised to 'ruAA-' from 'ruA+'.

"The upgrade reflects the strengthening of Central Telecom's financial profile, especially the liquidity position," said Standard & Poor's credit analyst Alexander Griaznov.

In August 2009 Central Telecom repaid its Russian ruble (RUR) 5.6 billion ($190 million) bond--its largest debt maturity--using proceeds from a new RUR4.3 billion long-term credit facility from Sberbank and cash balances. Central Telecom continues to generate strong free operating cash flow (RUR7.7 billion in the 12 months ended June 30, 2009), most of which is available for debt repayment. The company also maintains a meaningful portion of committed credit lines undrawn, which further enhances its financial flexibility.

We consequently believe that the company will be able to fully cover its 2010 maturities out of free operating cash flow. As a result we believe that the company's gross adjusted debt-to-EBITDA ratio could decline further by year-end 2010, from 1.6x on June 30, 2009. This would further support our assessment of Central Telecom's financial risk profile. The actual deleveraging pace will depend, however, on the company's strategy, in particular the aggressiveness of the investment policy, and refinancing or repayment decisions.

The ratings on Central Telecom remain constrained by the company's exposure to Russia's immature financial markets, limited revenue diversification, and increasing competition in the most lucrative areas, such as Moscow Oblast.

The ratings are supported by Central Telecom's resilient market position, shown by its fixed-line market share or more than 70%, its vast network in European Russia's central region, and its ownership of last-mile access to 6.7 million customers.

The stable outlook reflects our expectation that Central Telecom will continue to generate strong operating cash flow, which will allow it to finance its capital expenditures and service its debt obligations.

"Ratings upside would depend on the company meaningfully strengthening its business profile, although we consider it unlikely in the near term, given the maturity of fixed-line telecoms services. Ratings downside could result if the company's operating performance deteriorates or in case of a more aggressive investment policy leading to weaker liquidity or increased debt leverage," said Mr. Griaznov.
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    Rostelecom - Center
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