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Fitch: MTS's Ratings Unlikely to Be Affected by Subsidiary's Finance Problems

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Fitch Ratings says that the ratings of Russia's Mobile TeleSystems's (MTS) are unlikely to be affected by a court ruling against its subsidiary company, MTS Finance. On 5 January 2011, an arbitral tribunal issued a final ruling against MTS Finance, a Luxembourg company that was used as a vehicle to issue 2012 USD400 million bonds guaranteed by MTS. MTS Finance is liable to pay USD176 million plus interest and related costs, amounting to approximately USD210 million in total.

Fitch understands that MTS is exploring various options to minimise its losses at MTS Finance.

Although the ruling does not directly apply to MTS, a failure of its subsidiary to make payments under a court ruling for over 60 days can trigger an event of default under the 2012 bond documentation, the 2020 USD750 million bond documentation and various bilateral credit agreements. The deadline for this to potentially happen is 5 March 2011.

In addition, any other event of default at MTS Finance can trigger cross-default provisions in MTS's bond and bilateral credit documentation. MTS is seeking waivers from its creditors so that any problems at MTS Finance resulting from the court ruling do not and will not constitute an event of default with respect to any of MTS's debt. The meeting of 2020 bondholders is scheduled for 15 February 2011, well ahead of the projected MTS Finance's default deadline.

Fitch notes that the court ruling does not affect significantly MTS's creditworthiness. The absolute dollar value of the court ruling against MTS Finance is not material, it is equal to less than 5% of MTS's OIBDA during the last 12 months to end-Q310. At end-September 2010, MTS had USD2.2bn of cash on its balance sheet, and had access to various credit lines that can comfortably cover its exposure at MTS Finance. Any failure to make a payment under the court ruling would not reflect MTS's inability to do so, but rather its intention to minimise losses.

Fitch does not expect MTS to face any significant problems receiving waivers from its creditors. Although MTS has no guarantee that none of its creditors would drop its right to accelerate, a decision to do so would not be related to any fundamental factors shaping MTS's credit quality. MTS has already reduced its refinancing exposure. Its domestic bonds with a total face value of RUB85bn (approximately USD2.8bn) do not contain any cross-default language and do not require waivers. MTS has publicly disclosed that it has already received waiver confirmation from its bilateral creditors with respect to USD780m of its debt. At end-Q310, MTS total debt was reported at USD8,350m, the company had USD2,529m of cash and USD206m of short-term investment at that time.

MTS has also made an offer to buy back USD400m bonds. Concurrently, it is also seeking the consent of the 2012 bondholders to substantially remove all restrictive covenants and events of default with the exception of non-payment of interest and principal, and also change certain legal provisions to simplify bond defeasance. Fitch notes that if not defeased, the bond will continue to benefit from the same guarantee from MTS as before, although with an unusually light covenant package. Fitch believes MTS's willingness and ability to respect its obligations under the guarantee has not changed, which supports the instrument's rating of 'BB+'.

MTS is rated Long-term Foreign and Local Currency Issuer Default Rating (IDR) 'BB+' with a Positive Outlook, Short-term IDR 'B' and National Long-term rating 'AA(rus)' with a Positive Outlook.

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