October 21, 2011 |
|Fitch Ratings-Moscow/London-20 October 2011: Fitch Ratings has upgraded OJSC Tattelecom's Long-term Issuer Default Rating (IDR) to 'BB' from 'BB-'. Fitch has also affirmed the Short-term IDR at 'B'. The Outlook for the Long-term IDR is Stable.|
The upgrade reflects the material improvement in the company's liquidity and operational and financial performance in line with Fitch's expectations.
The company's improved liquidity has been driven by several factors. First, free cash flow (FCF) generation has become positive, with the FCF-to-revenue ratio reaching 18.8% in 2010. Fitch believes that the company will likely demonstrate slightly positive FCF generation in the mid term Secondly, in 2010-H111 Tattelecom has been actively refinancing its debt, and by end-Q311, less than one-third was short term, while more than half matures after 2013. Thirdly, the company has successfully renewed its overdraft lines and received a new three-year revolving credit facility of RUB200m. Fitch believes that Tattelecom can comfortably meet its short to medium-term obligations.
As Fitch expected, the company's revenue from main telecom services (voice fixed, broadband/IPTV and interconnect/wholesale) grew moderately by 3.3% y-o-y in 2010. Fitch expects that in the mid term, solid revenue growth from broadband/IPTV services will slightly over-compensate for the revenue decline in voice fixed and interconnect/wholesale segments. In 2010, revenue dynamics from the main telecom services comprised strong broadband/IPTV revenue growth (+22.3%), and moderate decline voice fixed and interconnect/wholesale revenues (-2.4% and -4.5%, respectively). Revenue growth in broadband was driven by a quickly growing subscriber base, which was 264,000 at end-2010 (+36% compared to end-2009).
The company has started to deploy fibre infrastructure, which should support it to continue capturing market share in the broadband segment and acquired 8,000 IPTV customers. Revenue declines in voice fixed and interconnect/wholesale segments were primarily caused by traffic migration into alternative and nationwide mobile operators' networks. Fitch expects that this trend will continue in the mid term. The company's total revenue grew by 7.6% in 2010, but of the total RUB420m growth, RUB255m came from other services which may not be repeated.
Fitch also notes that cash flow generation in 2010 remained strong and Tattelecom will likely be able generate EBITDA margin at 40% in the mid term. In 2010, the EBITDA margin and FFO/revenue ratio were 41.6% and 34.9%, respectively, compared with 44.2% and 35.1% in 2009.
In Fitch's view, Tattelecom will continue to deleverage given its expected positive FCF generation. In 2010, the company repaid most of the principal of its outstanding bond before the maturity date in July 2012 (RUB1.3bn of RUB1.5bn), and leverage net debt/EBITDA declined to 1.0x, compared with 1.5x in 2009 and 1.6x in 2008.
Tattelecom has a solid 'BB' profile. The rating is constrained by the small size of the company's business, which makes it potentially more sensitive to liquidity problems; lack of geographical diversification; moderately aggressive liquidity management and limited access to capital markets. Cautious liquidity management is a key factor for supporting the Long-term IDR. Significant deterioration of the company's position in the broadband market, leading to pronounced revenue pressure combined with net debt/EBITDA leverage sustainably above 1.8x and/or liquidity pressure would likely trigger a negative action.
|Full company name||Tattelecom|
|Country of risk||Russia|
|Country of registration||Russia|