Russia's MTS Gets Ratings Outlook Upgrade
Published on: 26th Feb 2014
By: Ian Mansfield
Fitch Ratings has revised the outlook on Russia's Mobile Telesystems' (MTS) Long Term debt rating to Positive from Stable and affirmed the rating at 'BB '. The improvement reflects the revision of the outlook on its controlling shareholder Sis tema to Positive.
Fitch noted that MTS is a leading Russian and CIS mobile operator with modest leverage and strong free cash flow generation. It is the largest operator in Russia and the second-largest in Ukraine by subscribers.
On a standalone basis, MTS's credit profile is commensurate with a low investment grade rating. MTS's ratings are notched down for the negative influence of Sistema, MTS's majority shareholder. Under Fitch's methodology, a subsidiary can be generally rated maximum two notches above its parent if the parent-subsidiary linkage is weak.
Robust FCF Generation
MTS sustainably generates positive free cash flow (FCF). Capex as a percentage of revenue has been high (well above 20%) inflated by 3G, and more recently, LTE spending in Russia. Fitch expects this ratio to drop in the medium to long term, but stabilise at a higher level than MTS's European peers, due to lower ARPU.
Sufficient LTE Spectrum
MTS has sufficient LTE spectrum to successfully compete in Russia. The introduction of technological neutrality regarding the use of radio spectrum in Russia will allow the re-farming 1800MHz frequencies, reducing a need for expensive clearance of 800MHz spectrum.
MNP Not A Threat
The introduction of mobile number portability (MNP) in Russia in 2014 is unlikely to put MTS in a disadvantaged position. Fitch said that it believes that the hardest hit will be operators in the middle, with the lowest priced and market leaders including MTS potentially benefiting from the regulatory change.
Sluggish Growth Prospects
Key Russian and Ukrainian mobile markets are mature and unlikely to demonstrate further strong growth. Fitch expects demand for faster data to remain strong but it will be a challenge to monetise it with all operators chasing heavy-data customers. Competition is likely to intensify in light of the market-share ambitions of Tele2 Russia backed by mobile assets of Rostelecom. However, the ratings agency believes the impact of the new larger market player will only be felt from the second half of next year
MTS's leverage has been moderate at below 1.5x net debt/EBITDA and 2.0x FFO adjusted net leverage. Organic development, including LTE roll-out in Russia, but also increased pay-outs under a dividend policy revised in November 2012 and updated in February 2014 should not jeopardise this.
Corporate Governance is Key
MTS has adhered to high standards of corporate governance with its strategy and all key transactions reviewed and approved with the involvement of independent directors. Fitch notes that Sistema's financial situation at the holdco level is improving, which reduces risks that it may leverage its control over MTS to extract excessive cash flows. High transparency on Sistema's financial situation and strategy and its rating level differentiate MTS from most other private telecom companies in Russia, where there is significantly less visibility of strategic plans and the financial agenda of their controlling shareholders.