Fitch Revises Russia's MTS Debt Ratings Outlook to Negative

Fitch Ratings has affirmed Russia-based Mobile TeleSystems's (MTS) Long-term Issuer Default rating (IDR) at 'BB+', National Long-term rating at 'AA(rus)' and Short-term IDR at 'B'. The Outlooks for the Long-term IDR and National Long-term rating have been revised to Negative from Stable. The agency also assigned MTS's outstanding domestic bonds series 1 and 2 a final senior unsecured foreign currency rating of 'BB+' and a National Long-Term rating of 'AA(rus)'.

The rating action follows a revision of the Outlook on Joint Stock Financial Corporation Sistema's IDRs to Negative from Stable. MTS is majority-controlled by Sistema ('BB-'(BB minus)/Outlook Negative), which exercises significant influence on MTS's financial and operating strategies including its dividend payments and treasury policies. The Negative Outlook reflects MTS' continued exposure to the increased risks in the non-telecom segments of the Sistema group and a likely increase in its stand-alone refinancing risks by 2010 if the HoldCo pressures MTS for more dividend payments, and if the Russian Ruble continues to depreciate. MTS is exposed to significant foreign currency risks because its revenues are derived in Russian rubles and other local currencies of CIS countries where it operates, while a significant share of its debt is denominated in USD and, to a lesser extent, in Euro.

MTS' stand-alone operating and financial performance is likely to remain strong in the expected challenging economic environment. Its mobile business is expected to be reasonably resilient to macroeconomic deterioration. Although further growth is likely to stall, relatively low ARPUs across MTS's entire geographic franchise will protect it against a fall in revenues on the back of expected stable usage. After many years of strong growth, the company has the opportunity to oversee efficiency improvements and cost-cutting in a less dynamic market which will help support its margins.

MTS's domestic RUB10bn bond series 1 has a headline maturity in October 2013, and its RUB10bn series 2 has a headline maturity in October 2015. However, both bonds were issued with 18-month put options attached which limits their effective maturity to 1.5 years.

Posted to the site on 20th November 2008