February 14, 2008 | Cbonds
|Fitch Ratings-London/Moscow-14 February 2008: Fitch Ratings has today assigned Russia-based OJSC Volgatelecom (Volga) a Long-term Issuer Default rating (IDR) of ‘BB-’ (BB minus), National Long-term rating of ‘A+(rus)’ and Short-term IDR of ‘B’. The Outlooks for the Long-term IDR and National Long-term rating are Stable. The agency also assigned a National Long-term rating of ‘A+(rus) to three of Volga’s outstanding domestic bonds, structured as senior unsecured obligations, as follows: |
Series 2, RUB3bn, due on 30 Nov 2010: National Long-term rating ‘A+(rus)’
Series 3, RUB2.3bn, due on 30 Nov 2010: National Long-term rating ‘A+(rus)’
Series 4, RUB3bn, due on 03 Sept 2013: National Long-term rating ‘A+(rus)’
“Volga has consistently been the most profitable and one of the least leveraged Russian incumbent operators. A positive short-to-mid-term growth outlook for higher-margin mobile and broadband segments, and management’s focus on cost-cutting will help maintain margins and ensure overall growth rates in the high single-digit territory,” says Nikolay Lukashevich, a Senior Director with Fitch’s TMT team.
The ratings take into account Volga’s position of an established fixed-line incumbent telecoms company in its operating territory. Volga controls most of the last-mile and backbone infrastructure in its area of operations, which provides it with significant competitive and cost advantages. Volga’s market shares are strong in all key traditional segments, and as the company is facing only limited competition from alternative operators, these are unlikely to come under pressure at least in the short-to-mid term. Fitch sees the regulatory environment in Russia as generally pro-incumbent, which protects Volga against competition with alternative operators in the traditional fixed-line segment; however, it is not immune to pressure from the mobile segment. With true unbundling regulation missing in Russia, the only way for alternative providers to eat into Volga’s franchise is to build their own infrastructure, which is expensive, time-consuming and economically viable in only selected areas.
Although Volga is only a niche mobile operator, the segment’s margins are strong and the business is run as a cash cow with a positive contribution to overall margins and cash flows. Strategically, the future of this segment remains uncertain; however, the company’s narrow focus on its target customer base of price-sensitive local subscribers should help it withstand pressure from larger players.
In spite of healthy margins, Volga has been free cash flow negative on the back of heavy investments into fixed-line network modernisation, and mobile and broadband roll-out. The company is facing high infrastructure modernisation requirements in the mid-term, which is likely to prevent it from turning free cash flow positive.
Volga is one of the least leveraged Russian regional incumbent operators. At 1.5x of Net Debt/EBITDA at end-2006, its leverage is modest in absolute terms, and strong for its rating level. The agency does not expect leverage to significantly increase in future.
Volga’s strategy is largely shaped by its majority shareholder, government-controlled Svyazinvest. The ratings reflect Svyazinvest’s strong influence on the decision-making process at Volga, but also its lobbying support.
At end-H107, the proportion of short-term debt (less than one year) was reported at 18% of the total, an improvement from 23% at end-2006; this is stronger than for most of the company’s domestic peers. Although the company does not have significant short-term debt maturities, its two RUB3bn domestic bonds are putable in December 2008 and September 2009, which increases its refinancing exposure.
Company: Rostelecom - Volga
|Full company name||Rostelecom – Volga|
|Country of risk||Russia|
|Country of registration||Russia|