April 10, 2015 |
|09 April 2015: Fitch Ratings has affirmed Russia-based OJSC Tattelecom's (Tattel) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB' and Short-term IDR at 'B'. The Outlook on the Long-term IDR is Stable.|
The ratings reflect Tattel's well-established position as a fixed-line incumbent in the Russian republic of Tatarstan (BBB/Negative), with a dominant share in the traditional telephony market. It has quickly become the largest broadband player in its operating territory, and made a successful entry into pay-TV. The company launched a mobile service in 2013, and start-up losses are likely to negatively impact the company's EBITDA margin in 2015. The rating also reflects the company's small scale and weak parental support.
KEY RATING DRIVERS
Strong Market Shares
Tattel has been able to successfully defend and even expand its market shares, most notably to 60% in the broadband segment in terms of revenue, in spite of a congested competitive environment. Its pay-TV market share increased by 14ppts in 2014, reaching almost 50%. We believe the company is likely to continue eating into its peers' market shares, capitalising on its good-quality network and a dedicated regional focus. With the lack of unbundling regulation in Russia and the company's established local power, the stronger financial resources of its larger national peers will not necessarily lead to operating competitive advantages.
Mobile Development to Accelerate
Tattel's entry into the mobile segment is strategically sound and complements its existing wireline operations. Although it enables the company to become a sole provider of quad-play bundles in Tatarstan, the value of quad-play service in Russia remain untested. The company has largely completed the rollout of its 2G/4G network and now plans to focus on subscriber acquisition. Tattel plans to increase market share by cross-selling its mobile services to its large existing fixed-line subscriber base. The company's high capacity core network, which is the foundation of its fixed-line operations, should also support a good quality mobile data service offering.
Competitive Mobile Market
Tatarstan is a competitive mobile market, with four other mobile operators as well as Tattel. There are 6.5m subscribers in total with a 172% mobile penetration rate as of end-2014. Tattel's market share in terms of subscribers was less than 1% at end-2014, but subscriber additions have notably accelerated in the past several months. Tattel positions itself as a price discounter with easy to understand tariffs and a high-quality network and aims to provide leading customer service. A number of cheap promotional offers for new customers should lead to faster subscriber growth but is likely to be a drag on the company's overall EBITDA margin.
We estimate Tattel's leverage increased to 1.0x net debt/EBITDA and 1.7x funds from operations (FFO) adjusted net leverage at end-2014 due to high capex for the mobile network rollout. Leverage will likely further increase in 2015 due to the partial deferral of payments for equipment from 2014 and pronounced pressure on the EBITDA margin from expected losses in the mobile segment. However, we expect leverage to remain below the downgrade trigger of 2.25x FFO adjusted net leverage. Deleveraging is likely from 2016 with an improvement in the financial performance of the mobile segment.
Tattel's liquidity is insufficient to cover 2016 debt maturities, which is a risk. If there is no progress with finding sufficient liquidity sources to cover next year's maturities by late 2015, it may prompt negative rating action. However, Tattel's liquidity situation is mitigated by strong relationships with local banks and affiliation with one of the main creditors as well as by the flexibility to reduce capex and receive potential liquidity support from the company's controlling shareholder, OJSC Svyazinvestneftekhim (SINEK; BBB-/Negative). Refinancing efforts will be helped by Tattel's overall low leverage.
Small Size A Limitation
The company's small size could limit its financial options. Even the smallest Russian market convention size bond issue would create a substantial bullet refinancing exposure on the company's balance sheet. Tattel has predominantly relied on bank financing, where size is less of an issue.
Weak Parental Support
Fitch considers operational and strategic ties between the company and its controlling shareholder, SINEK, as weak. Therefore Tattel's rating primarily reflects its standalone credit profile. However, it is likely that SINEK would provide liquidity or lobbying support if necessary.
- Stable market positions in the fixed-line segment
- Largely stable total revenue growth in low single digits
- Moderate EBITDA margin decline in 2015-2016 pressured by mobile segment
- Stable core EBITDA margin without mobile segment in mid-30s
- Gradually rising interest payments as historical low-interest debt instruments are replaced with more expensive debt
- Capital expenditure at around 27% of revenue in 2015 with further notable decline below 20%
A downgrade could be triggered by a rise in leverage to above 2.25x FFO adjusted net leverage on a sustained basis. Tight liquidity and cash flow pressures driven by revenue and market share losses, particularly in the broadband segment, could also be negative for the ratings.
Rating upside is constrained by the company's small size, its lack of geographical diversification, and limited access to capital markets.
|Full company name||Tattelecom|
|Country of risk||Russia|
|Country of registration||Russia|