Moody's: Spectrum Auction Result is Credit Positive for Sistema

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Moody's Investors Service has today said that the result of a recent auction for mobile spectrum in India is credit positive for Sistema as it implies that the company will need to make only moderate additional investment to retain its business in India while it also provides growth opportunities due to technological neutrality of the won spectrum.

On 11 March, Sistema's 57% subsidiary Sistema Shyam TeleServices Ltd (MTS India) won the auction for mobile spectrum in the 800 MHz band in eight Indian circles, for a total consideration of USD665 million. Of this total, US$297 million is covered by SSTL's licence fees, which it has already paid. The remaining USD368 million is to be paid in 10 equal annual installments starting from 2016.

Moody's views the additional investment to be made by SSTL as fairly moderate compared with what was anticipated a year ago, when the licences were revoked by the Indian authorities, which demanded additional payment for them potentially amounting to billions of US dollars. Given that SSTL is as yet unprofitable, Moody's believes that any burden in terms of the payment of additional licence fees would fall on its parent company Sistema. That said, Moody's recognises that deferral of payment to 2016 is beneficial for Sistema, as there will be no immediate pressure on its liquidity as a result.

Until now, the uncertainty regarding SSTL's additional payment for its revoked licences was one of the main factors exerting pressure on Sistema's credit profile. If the payment required for Sistema to retain its Indian business were to have been material, it would likely have drained the company's liquidity at the parent company level and possibly increased its leverage (which was 2.1x debt/EBITDA on a consolidated basis as of September 2012, as adjusted by Moody's). The completion of the auction puts an end to that uncertainty.

Moody's notes that the won spectrum is technologically neutral, which means that SSTL will be able to develop LTE-based mobile data services on that spectrum, gradually replacing its current offerings based on the ageing CDMA technology. Although SSTL ceased its operations in 13 out of 22 circles in which it was present before the licences were revoked, the company estimates that the remaining nine circles provide a dominant 75% of its revenues and comprise more than 60% of potential mobile data services subscribers in India.

Sistema is Russia's largest public financial corporation, with a diversified asset base in oil & energy, telecoms, technology, banking, media, retail and other businesses. The founder of the company, Mr. Vladimir Evtushenkov, holds 64.18% of Sistema's common shares. The remainder is held by minority shareholders and is in free float. In the last 12 months to 30 September 2012, Sistema generated revenue of $33.2 billion and EBITDA of $9.0 billion (as adjusted by Moody's).

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Tags: mts  sstl  sistema  India 

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