Fitch Affirms Rostelecom Debt Ratings; Outlook Stable
Fitch Ratings has affirmed Russian landline operator, Rostelecom's Long-term debt rating at 'BBB-' with a Stable Outlook.
Rostelecom is the Russian fixed-line incumbent operator benefiting from only limited facilities-based competition and benign regulatory environment. It is a strategic asset for the government and the company's ratings benefit from one notch for potential support.
Established Incumbent Status
Rostelecom holds a strong incumbent position in the traditional voice fixed-line segment, complemented by its broadband market leadership. Given the lack of local loop unbundling, the company's fixed-line market shares are likely to be preserved. The key risk is fixed-line customer disconnections, which Fitch expects to remain moderate compared with its European peers.
Evolving Mobile Strategy
Rostelecom is only a niche player in the mobile market but is a prime candidate to participate in industry consolidation. Teaming up with Tele2 Russia will likely create a stronger market player and will help address the scale issue. Either teaming with Tele2 Russia or maintaining standalone operations, Rostelecom would need substantial capex to reduce a capacity and coverage gap with its larger mobile peers, particularly in data.
A potential acquisition of Tele2 Russia would be treated by Fitch as an event risk. We estimate that with a degree of financial prudence, the impact of this acquisition on leverage may be tolerated within the current ratings.
Positive Regulatory Environment
Fitch says that it views the current regulatory environment in Russia as generally benign for the incumbent operator and expect it to remain so. Although the regulator is sympathetic towards providing non-discriminatory access to the incumbent's network, the practical implementation of this may not be easily achievable.
The introduction of mobile number portability will likely benefit smaller players including Rostelecom.
Rostelecom's IDR factors in a one-notch uplift for potential sovereign support, as strategic and operational ties with the government are viewed by Fitch as reasonably strong. Rostelecom remains a key infrastructure provider to the Russian military and a key contractor in other large-scale projects, such as "digital government", and the provision of universal services. The government is likely to let Rostelecom pay only modest dividends prioritising infrastructure investments.
The company's leverage is moderate with net debt/EBITDA at 1.7x and FFO adjusted net leverage at 2.1x at end-2012. Fitch expects leverage to rise to 1.9x-2.0x by end-2013 due to high capital expenditure and a share buy-back. Organic development is unlikely to push leverage to above 2x, although this may be compromised by acquisitions.
Rostelecom's current maturity profile is reasonably well-spread. At end-June 2013, 24% of the company's debt was short term, a significant improvement from 47% at end-2011. We understand the company is planning to maintain an approximate 25/75 split between short- and long-term debt. By the debt rating's estimates, the company has sufficient liquidity to finance share buy-backs in conjunction with the Svyazinvest acquisition and cover over 12 months of coming debt maturities as of end-H113.