MTS's Debt Rating is Constrained by Competitive and Political Uncertainties
Published on: 26th Mar 2014
By: Ian Mansfield
The debt ratings agency Moody's has written that Russia based Mobile TeleSystems' (MTS) rating benefits from the company's continuing strong operating and financial performance. However the rating is constrained by a degree of uncertainty over developments in the competitive environment of the company's core Russian market as a result of the introduction of mobile number portability (MNP) in December 2013 as well as the establishment of a joint venture between Tele2 Russia and Rostelecom.
In addition, MTS's rating is constrained by uncertainty with regard to the ongoing conflict between Russia and Ukraine, which may adversely affect MTS's businesses in both countries, although to differing extents.
On 18 March 2014, MTS reported strong operating and financial results for 2013. The company's leverage, measured by adjusted debt/EBITDA, is estimated to have declined to around 1.5x and retained cash flow (RCF)/debt to have increased to above 40% as of year-end 2013 from 1.7x and 33%, respectively, a year earlier (all metrics are Moody's-adjusted). Both metrics would be well within Moody's guidance for an upgrade of MTS's rating. The anticipated increase in MTS's dividend payouts to above RUB90 billion cumulatively in 2014-15 (compared with RUB40 billion in 2013) is unlikely to weaken the company's financial metrics materially.
However, going forward MTS's financial metrics could be adversely affected by a potential increase in competitive pressure within the Russian mobile market following the introduction of MNP in December 2013, which may challenge MTS's ability to maintain its revenue growth at 3%-5% and high adjusted EBITDA margin of above 46% in 2014-15. In particular, MNP may intensify competition between MTS and MegaFon OJSC (Baa3 negative) in the mobile data segment, including long term evolution (LTE) offerings, which may become a key subscriber retention tool and the main driver of revenue growth for Russia's "big three" mobile operators (MTS, MegaFon and Vimpel-Communications OJSC (Ba3 stable)) over the next three years.
In addition, in the next 18-24 months the competitive landscape could change as a result of the establishment of a joint venture between Rostelecom and Tele2 Russia in early 2014, which will combine the mobile assets and subscriber bases of the two contributors. The joint venture, T2 RTK Holding, will become the fourth-largest mobile operator in Russia, with a 16% market share by subscriber as of year-end 2013 (according to the research agency Advanced Communications and Media (AC&M)), and may challenge the "big three" market positions as it closes the gap with them in terms of network coverage, 3G and LTE offerings.
Moody's also notes that the ongoing political crisis and difficult economic environment in Ukraine, where MTS generates around 10% of its revenue and 12% of reported OIBDA, may adversely affect MTS's consolidated financial metrics, as well as the company's ability to upstream cash from its Ukrainian business. Furthermore, Russia's continuing political conflict with Ukraine increases Russia's susceptibility to geopolitical event risks, which may materialise in the form of economic sanctions against Russia.
MTS is one of the leading integrated telecommunications groups in Russia, with the highest mobile market share (31%) in terms of subscribers as of year-end 2013, according to AC&M. In 2013, MTS generated revenues of RUB398 billion and reported OIBDA of RUB175 billion. As of the same period, the company derived 89% of its revenues from its operations in Russia, 10% from Ukraine, and 1% from Armenia and Turkmenistan. Sistema Joint Stock Financial Corporation (Ba3 positive) controls 51.46% of MTS, with the remainder in free float.