S&P Upgrades Russian Sistema and Subsidiaries MTS And Comstar
Standard & Poor's Ratings Services has raised its long-term corporate credit rating on Russian holding company Sistema to 'BB' from 'BB-'. The outlook is stable. A recovery rating of '4' was assigned to the issue rating on subsidiary Sistema Capital's unsecured debt issues guaranteed by Sistema. At the same time, the long-term rating on Sistema's 52.8% subsidiary Mobile Telesystems (MTS) was raised to 'BB' from 'BB-'. The outlook is positive.
"The upgrade of Sistema reflects the continuing strong performance of its core telecoms assets, moderating financial policy, and tangible progress in streamlining operations and strengthening the corporate structure," said Standard & Poor's credit analyst Alexander Griaznov. "The upgrades of the subsidiaries are concomitant with the upgrade of Sistema."
Sistema's consolidated revenues and EBITDA grew robustly by 33% and 29%, respectively, in 2007. Revenue diversity continues to improve on the back of explosive growth in consumer-oriented business segments, but MTS continues to provide most of Sistema's operating profitability and cash flow generation. Comstar has made substantial investments in its network and carried out a number of small scale acquisitions in Russia and is now set to benefit from the rapidly growing broadband market.
Importantly, Sistema's other businesses, including in technology and real estate, show signs of recovery and now generate positive operating income before depreciation and amortization. The rating on Sistema is constrained by the group's relatively aggressive financial policy, with a strong focus on business growth; predisposition to acquisitions; and limited cash flow diversification, exacerbated by the cash consumption of many of its growth-oriented business segments.
In addition, Sistema has started ambitious capital-intensive construction of a nationwide mobile network in India, which should further limit the group's cash generation potential.
Sistema's consolidated debt was $9.7 billion as of April 1, 2008. It represents close to 1.7x consolidated EBITDA and remains below the threshold of about 2x targeted by Sistema's management. In addition, Sistema's stand-alone debt represents about 10% of the total portfolio value, which is supportive of the rating.
The stable outlook reflects S&P's opinion that Sistema will continue to streamline its existing operations and focus on the organic growth of its nonpublic businesses. They also expect Sistema and its key operating subsidiaries to carefully manage their future strategic investments and adjust their financial policies to prevent sharp increases in the group's consolidated financial leverage.
"Ratings upside for Sistema could result from our gaining comfort in terms of business diversification and the cash flow contribution from nontelecoms assets, long-term financial discipline and governance practices," said Mr. Griaznov.
Downside pressures could stem from rapid and aggressive changes in the group's financial policy and corporate strategy, leading, among others, to deterioration in credit measures and/or less visibility and comfort on the evolution of the group's financial policy.
Ratings upside potential for MTS, indicated by the positive outlook, acknowledges MTS' solid credit profile on a stand-alone basis, recognizing the opportunity of a higher rating than that on its parent.
Posted to the site on 28th August 2008
