Russia-Based MegaFon Finance Assigned 'BBB-' Long-Term Rating, Proposed Notes Rated 'BBB-'; On CreditWatch Negative
September 28, 2012 Standard & Poor's
• We are assigning our 'BBB-' long-term corporate credit rating to MegaFon Finance LLC, the finance subsidiary of telecoms operator OJSC MegaFon, and our 'BBB-' issue rating to MegaFon Finance's proposed senior unsecured notes.
• The rating on MegaFon Finance is equalized with the rating on the parent MegaFon, based on our view of the subsidiary's strong integration in the MegaFon group as the main financing vehicle for the ruble bond market and the almost certain likelihood of parental support.
• The long-term and issue ratings on MegaFon Finance are on CreditWatch negative, mirroring the CreditWatch on the MegaFon ratings.
On Sept. 28, 2012 Standard & Poor's Ratings Services assigned its 'BBB-' long-term corporate credit rating to MegaFon Finance LLC (MegaFon Finance), the finance subsidiary of Russian mobile telecommunications operator OJSC MegaFon (MegaFon, BBB-/Watch Neg/--, Russia national scale ruAAA/Watch Neg/--). At the same time, Standard & Poor's assigned its 'ruAAA' Russia national scale long-term rating to MegaFon. We also assigned our 'BBB-' issue rating to the company's Russian ruble (RUB) 10 billion ($320 million) proposed senior unsecured notes due 2022. The long-term and issue ratings are both on CreditWatch with negative implications, mirroring the CreditWatch placement of the ratings on MegaFon.
We equalize the long-term rating on MegaFon Finance with the long-term rating on MegaFon, reflecting on our view of an almost certain likelihood that the parent would provide financial support to its subsidiary, if needed. We base our view on the following:
• The finance subsidiary is 100% owned by MegaFon.
• MegaFon guarantees all the debt of its finance subsidiary. Although the suretyship agreement provided by MegaFon doesn't fully meet our criteria on guarantees, it is the only legally recognized way to provide a corporate guarantee in Russia. Consequently, we view the suretyship agreement as an important sign of potential parental support.
• We understand the proceeds from the proposed notes issue will be passed to MegaFon.
• The finance subsidiary is closely associated with MegaFon, has a similar name, and its default would negatively affect the parent's access to the capital markets.
The 'BBB-' issue rating on the proposed notes reflects the 'BBB-' corporate credit rating on MegaFon Finance. We assume the proceeds from the notes will be onlent to the parent company, who will use it to refinance part of its debt. The rating on the proposed notes is subject to review of final documentation.
MegaFon provides support for the proposed notes to be issued by MegaFon Finance in the form of suretyship agreements governed by Russian law. We understand that, under current Russian law, only credit institutions and insurance companies can provide on-demand guarantees. We believe that the suretyship undertakings provided by MegaFon are a weaker form of support than on-demand guarantees and do not fully meet Standard & Poor's criteria on guarantees for rating substitution purposes, including in particular the timeliness of payments of the guaranteed obligations. We understand in this respect that, under the surety agreements, the guarantor has 14 days to examine the claim of a noteholder and 10 additional days to make payment, to the extent the guarantor determines that the issuer did not pay the required amount in full. Under Standard & Poor's criteria, we expect the guarantor to pay the guaranteed obligations on demand as they fall due, which we interpret as no later than five business days after the due date for payment (see "Timeliness of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings," published Dec. 23, 2010, on RatingsDirect on the Global Credit Portal).
We also note that certain other features of OJSC MegaFon's surety agreement are not consistent with an on-demand unconditional guarantee under our criteria (see "European Legal Criteria For Structured Finance Transactions," published Aug. 28, 2008). For example, the guarantor does not waive its rights of set-off, counterclaim, and other defenses.
Notwithstanding the above, we believe that the surety agreement, combined with the factors that underpin our equalization of the corporate credit rating on MegaFon Finance, explained in the opening paragraph of this section, have sufficient strength for us to treat the proposed bonds pari passu with senior unsecured debt of the surety provider, MegaFon.
Company — MegaFon Finance
Full nameMegaFon Finance LLC