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Fitch Affirms OAO Uralsvyazinform at 'B+'; Outlook Stable

January 24, 2008 | Сbonds

Fitch Ratings has today affirmed Russia-based OAO Uralsvyazinform's (Ural) Long-term Issuer Default Rating (IDR) at 'B+', National Long-term Rating at 'A-(A minus)(rus)' and Short-term IDR at 'B'. The Outlooks on the Long-term IDR and National Long-term rating are Stable.

"Ural's market positions have been relatively stable over the last three years, and we do not expect significant changes at least in the short- to medium-term," says Nikolay Lukashevich, Senior Director in Fitch's TMT team. "However, despite the company's strong financial performance in H107, suggesting improvements for 2007 overall and the positive outlook on medium-term growth and margin, Ural's debt maturity profile has deteriorated. Its high reliance on short-term financing entails significant refinancing risks, which are becoming more of a concern in the current unstable credit markets."

The ratings reflect Ural's strong, stable fixed-line and mobile market positions in the Urals and parts of western Siberia. Its market position in local services is unlikely to be rivalled in the foreseeable future while its control over the last-mile infrastructure will help it become the key player in the booming broadband market. In the absence of unbundling regulation, the only way for alternative operators to erode the company's franchise is to create their own infrastructure, which is costly, time-consuming and only economic in the corporate segment and in a few key cities. After significantly declining in 2003-2004 upon the arrival of nationwide providers on its operating territory, Ural's mobile market share has stabilised and in Q307 was at around 30% by subscribers and at 40% by revenues. Although strategically Ural's positions in the mobile business look uncertain, the company is likely to remain a strong regional niche player at least in the medium-term. Fitch expects broadband and mobile to remain key growth drivers for the company in the medium-term while traditional segments of local and zonal service, and fixed-line interconnect are likely to stagnate. The management's plans for additional cost-cutting and efficiency improvements on the back of organisational changes and network modernisation should help to sustain and grow margins, and also improve service quality. Ural benefits from a benign regulatory regime in Russia, although the positive impact of the 2006-2007 regulatory changes was much less pronounced for the company than for many of its peers. Ural's strategy is largely shaped by its majority shareholder, government-controlled Svyazinvest. The ratings reflect the latter's strong influence on the decision-making process at the company and its lobbying support.

Ural has been, and is expected to remain, consistently cash flow negative on the back of heavy investments in infrastructure modernisation and development, partially driven by regulatory and government pressure. Although not excessive in absolute terms, and fully consistent with the rating level, Ural's leverage was the highest among its domestic peers at 2.6x of net debt/EBITDA at end-2006. At end-H107 the proportion of short-term (less then one year) debt was high at RUB10.4bn, or 42%, of its total debt. Although this should have dropped after Ural successfully repaid a RUB3bn domestic loan in November 2007, Fitch notes that its high reliance on short-term financing remains a concern and a rating constraint. Ural, as an entity under ultimate state control, benefits from strong relationships with government-controlled banks, which somewhat mitigate its short-term refinancing exposure as these banks provide it with sizeable credit lines, albeit on an uncommitted basis.

Company: Rostelecom - Ural

Full company nameRostelecom - Ural
Country of riskRussia
Country of registrationRussia


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