January 20, 2006 | Cbonds
|Moody's Investors Service has today assigned a Ba3 corporate family rating to the Public Joint Stock Company Moscow City Telephone Network ("MGTS" or "the company"). The outlook on the rating is stable. At the same time, Moody's Interfax Rating Agency, which is majority owned by Moody's, has assigned Aa3.ru long-term national scale credit rating (NSR) to the company. |
According to Moody's and Moody's Interfax ("Moody's"), the Ba3 global scale rating reflects the company's global default and loss expectation, while the Aa3.ru national scale rating reflects the standing of the company's credit quality relative to its domestic peers.
The Ba3 corporate family and the Aa3.ru national scale ratings factor in (i) the company's leading market position and its ownership of the local loop infrastructure in Moscow; (ii) relatively benign competitive environment; (iii) growth potential in broadband and long distance interconnect as well as potential benefits from up-selling its services through Comstar United TeleSystems ("Comstar"), its immediate shareholder; (iv) the company's position as one of the key telecommunications assets of its ultimate shareholder - Joint Stock Financial Corporation Sistema (rated B1 / Stable outlook); and (v) its relatively conservative financial policy.
At the same time, the rating reflects (i) MGTS' heavy investment requirements in broadband and new generation network ("NGN") resulting in an expectation for negative free cash flow generation over the medium term; (ii) ongoing threat from fixed-to-mobile substitution; (iii) increasing competition from cable and other alternative operators for the provision of broadband and data services; (iv) highly uncertain regulatory environment and the risk of future tariff increases lagging inflation; and 6) low personal computer penetration, which could limit the growth of broadband services going forward.
MGTS currently owns over 90% of the residential access lines in Moscow whilst its share of active lines in business segment is close to 40%. The Ba3 rating reflects MGTS' ownership of the "last mile" in Moscow and the unlikely liberalisation of the local loop infrastructure over the medium term.
MGTS enjoys a relatively benign competitive environment. The company is a leader in the service provision to the residential customers albeit it faces increasing competition from alternative providers for the provision of broadband services. Moody's, however, notes that the market for the residential broadband services is relatively fragmented thus somewhat mitigating competitive threat of alternative providers. For the business customers, the company predominantly competes with Golden Telecom, one of the largest alternative providers active on this market. With MGTS' integration into Comstar UTS, it is envisaged that Comstar and its subsidiary MTU-Intel will increase their focus on business customers by utilising MGTS' infrastructure.
MGTS has been exposed to the fixed-to-mobile substitution which impacted the number of its potential customers. Going forward, it is reasonably likely that the effect of fixed-to-mobile substitution will lessen given that mobile penetration in Moscow is over 100%.
Moody's notes that MGTS' residential tariffs do not fully cover the costs associated with the provision of services to its residential customers. Given the track record of consistent tariff increases in the past, Moody's expects the company to reach the break-even point for its residential services over the medium term.
The Ba3 rating takes into account high regulatory uncertainty in Russia which results in some unpredictability in MGTS' revenues going forward. From January 2006, a number of regulatory initiatives are expected to be introduced in Russia, including liberalisation of services for domestic long distance and international long distance calls. Although it is somewhat difficult at this stage to quantify the potential impact of this initiative on MGTS' revenues, Moody's expects it to be favourable to the company.
MGTS is also well positioned to benefit from the potential growth in broadband Internet as well as from up-selling its services through Comstar UTS, its immediate shareholder. Moody's however cautions that, although the current broadband penetration is still relatively low in Moscow, any growth potential in broadband services could be limited by the comparatively low PC penetration.
MGTS also plans to pursue a sizeable capital expenditure programme to continue digitisation of its network and to invest into the new generation network. The planned capital expenditure programme will rely on supportive tariff evolution to be implemented in full. However, a large component of this spending relates to development initiatives which could be curtailed or postponed in the event current tariff expectations do not materialise. Moody's, however, notes relatively low digitisation of MGTS network (30% by the end of 2005) which could potentially impede provision of value added services.
As a result of the capital expenditure programme, Moody's expects MGTS to be free cash flow negative over the medium term. The Ba3 rating, however, relies on the expectations that the free cash flow deficits will not be sizeable and that the company will be able to finance the majority of its capex through internally generated cash flow thus limiting debt incurrence in the future. The Ba3 rating factors in limited financial flexibility for debt incurrence.
MGTS is an indirect subsidiary of AFK Sistema which implemented consolidation of its fixed-line assets under the umbrella of Comstar with a view to pursue an initial public offering of Comstar in the near team. The rating assumes maintenance of a conservative dividend policy going forward (including dividends to the company's preferred shareholders in the amount of up to 10% of the net income under Russian accounting standards).
The stable outlook on the rating reflects Moody's expectations that the company will be able to achieve further tariff increases to fund its operating expenses and to a large degree its capital expenditures. The outlook on the rating relies on the expectations that the company will not incur any material amount of debt over the medium term.
Furthermore, Moody's notes that due to Sistema's restructuring of its fixed line assets MGTS is now directly controlled by Comstar (a 56% stake) with Sistema now owning MGTS in part indirectly though its c. 80% ownership in Comstar. MGTS also owns a c. 19% stake in Comstar. The rating reflects Moody's expectations that any further corporate restructuring of the group, including commercial relations within the group, will be neutral to MGTS' credit profile.
The rating assumes that MGTS' dividend policy will not change were Comstar to be successful in acquiring Svyazinvest's 28% stake in MGTS through either a debt or equity financed transaction. Furthermore, Moody's assumes that MGTS' strategic focus within the Comstar group will remain broadly unchanged and that it will continue to be strategically managed on a stand-alone basis over the medium term.
Headquartered in Moscow, Russia, MGTS is the incumbent fixed-line operator in the Moscow metropolitan area with a population of over 10 million. In 2004, the company generated USD 480.8 million of revenue and USD 167.5 million of EBITDA.
NATIONAL SCALE RATINGS
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs in Russia are designated by the ".ru" suffix. NSRs differ from global scale ratings, as assigned by Moody's Investors Service, in that they are not globally comparable to the full universe of Moody's rated entities, but only with other rated entities within the same country.
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency specialises in credit risk analysis in Russia and is 51% owned and controlled by Moody's Investors Service, a leading provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets. Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO), which reported revenues of US$1.4 billion in 2004, employs approximately 2,500 people worldwide and maintains offices in 19 countries. Further information is available at www.moodys.com.
|Full company name||Public Joint Stock Company Moscow City Telephone Network (MGTS)|
|Country of risk||Russia|
|Country of registration||Russia|