Fitch Changes Megafon's Outlook to Positive

Fitch Ratings has changed the Outlooks on Russian mobile network operator, MegaFon's Long-term Issuer Default rating (IDR) and National Long-term rating to Positive from Stable. The change reflects Fitch's expectations that Megafon shareholders will ultimately be able to put in place a sustainable dividend policy that will be consistent with the company's creditworthiness.

At the same time, Fitch has affirmed the Long-term IDR and senior unsecured rating at 'BB+', the Short-term IDR at 'B' and National Long-term rating at 'AA(rus)'. MegaFon's US$375m eurobond due in December 2009, which is guaranteed by Megafon, is affirmed at 'BB+'.

Following the change in shareholder structure in 2008, co-operation among shareholders has improved, allowing the board to finally approve a legal merger of the head company with its subsidiaries. Prior to the shareholder change, this merger had reached an impasse, owing to a dispute among some of its previous shareholders.

Although shareholders have so far not been able to agree a dividend policy and no formal leverage targets have been put in place - which are key constraints on Megafon's ratings - Fitch believes these issues will eventually be resolved, without undermining Megonfon's strong credit profile.

"A key corporate governance concern has been that shareholders may decide to upstream too much cash out of the company. However, we do not believe shareholders will take any actions that could seriously jeopardise the value of their investments in the company," says Nikolay Lukashevich, Senior Director in Fitch's TMT team.

Fitch notes that Megfon's operating and financial performance in rouble terms is likely to be resilient in the current economic downturn. Megafon's market position is likely to be stable at worst, given its solid liquidity position versus its key competitors. Megafon also retains a flexibility to follow its competitors' move to scale back capex in the slow-growth environment although it is under less financial pressure to do so. Any capex rationing is likely to further improve its already strong free cash flow (FCF) generation.

By end-2008 Megafon's net debt and leverage was close to zero. Given the company's abundant FCF generation, it continues to accumulate cash on its balance sheet. Currency risks have so far been mitigated by hedging and a good currency match between debt and liquidity. The company has been able to convert its cash into USD and euro and keep them as short-term deposits with highly rated domestic banks. However, given the fundamental mismatch between rouble cash flows and FX debt, the amount of leverage acceptable within Megafon's rating is lower than its peers.

Posted to the site on 10th June 2009