Fitch Affirms the Debt Ratings of Russia's MTS with Stable Outlook
Fitch Ratings has affirmed Russia's Mobile Telesystems (MTS) Long-Term Issuer Default Rating (IDR) at 'BB+'. The Outlook is Stable.
On a stand-alone basis MTS's credit profile conforms to low investment grade. It is an established mobile operator with strong margins and free cash flow (FCF) generation and modest leverage. However, MTS has limited geographic diversification within CIS with high reliance on the Russian market. MTS's ratings are notched down for the negative influence of Sistema, MTS's majority shareholder.
MTS holds strong and reasonably stable market shares in all its key mobile markets - including, and most importantly, Russia. Fitch believes MTS will continue to successfully defend its positions and maintain broad parity with peers in terms of network coverage and technology solutions.
However, key Russian and Ukrainian mobile markets are mature and competitive pressures may intensify further in light of the market-share ambitions of Tele2 and Rostelecom in the medium term.
MTS sustainably generates positive FCF and overall financial performance is robust. Capex as a percentage of revenue has been high - well above 20% - inflated by 3G spend in Russia. Fitch expects this ratio to drop in the medium-to-long term but stabilise at a higher level than at European peers, due to lower average revenue per user (ARPU).
Reduced dealer commission fees and no handset subsidisation in Russia should be supporting margins. MTS managed to successfully change it relationships with dealers whereby the operator switched from paying a fixed fee to a revenue sharing model. The latter incentivises dealers to sign up quality subscribers with positive implications for churn but also protects MTS from paying excessive dealer commissions.
MTS has sufficient LTE spectrum to successfully compete in Russia. The company was one of the four winners in the all-Russia LTE spectrum auction in July 2012. In addition, MTS has ready-for-use 2.6GHz spectrum in the most lucrative Moscow market.
MTS's leverage has been modest at below 1.5x net debt/EBITDA and organic development, including LTE roll-out in Russia, can be financed with internally generated cash flows. Fitch estimates that a recent decision to increase dividend payments will not jeopardise leverage. However, the company is not committed to a public leverage target.
Fitch regards MTS's exposure to the group-wide risks of Sistema, and the holding company's flexibility to significantly increase MTS's leverage, if need be, as significant credit constraints. Under Fitch's parent-subsidiary methodology, the subsidiary's rating may be a maximum of two notches higher than that of the parent.
MTS's debt maturity profile is well spread, with single-year refinancing exposure below USD800m a year until 2015 (as of end-Q312). Currency risks are moderate, with the FX share of the total debt portfolio reported at 24% at end-Q312.