June 10, 2016 | Cbonds
|Fitch Ratings has affirmed Russia-based PJSC 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.|
Tattel's ratings reflect its strong positions as a fixed-line incumbent in the Russian Republic of Tatarstan (BBB-/Negative) with leading positions in traditional voice telephony, broadband and pay TV segments. Fitch expects the company's leverage to remain low at around 1.9x-2.0x funds from operations (FFO) adjusted net leverage in 2016-2019. The active development of the mobile segment is likely to continue to put moderate pressure on margins and constrain deleveraging. The ratings also reflect the company's small size and limited access to capital markets.
KEY RATING DRIVERS
Robust Performance in Fixed-line
Tattel has strong positions in its regional fixed-line market with leading revenue market shares in traditional voice telephony, broadband and pay TV. Most importantly, the company continues to expand its share in the broadband segment, which is the main contributor to Tattel's revenue. Stable average revenue per user is supported by rational competition and the ongoing upgrading of subscribers to fibre from ADSL. We believe the company is likely to continue eating into its peers' market shares, capitalising on its good quality network and its dedicated regional focus.
Modest Success on Mobile Market
Tattel entered the mobile market in 2013. By end-2015 it had acquired a 2% share by subscribers, which is below the company's initial expectations. The Tatarstan mobile market is very competitive, with four federal mobile operators alongside Tattel. Successful development of the mobile segment carries some execution risk. The company targets further aggressive expansion utilising a price discounter strategy. 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. The company's high capacity core network, which is the foundation of its fixed-line operations, should support a good quality mobile data service offering.
Leverage increased to 1.2x net debt/EBITDA or 1.8x FFO adjusted net leverage at end-2015 driven by high capex and pressure on EBITDA on the back of active mobile segment development. Leverage is likely to rise to around 1.9x-2.0x in 2016-2019 as pressures on EBITDA from its mobile operations persist. Increased interest expense on the back of debt refinancing at higher rates is also contributing to higher leverage. The company has the flexibility to control leverage by cutting capex and dividends.
Fitch applies a 6x operating lease capitalisation multiple instead of the previous 8x. Based on empirical observations over 2001-2015, the median 10-year Russian government bond yield was estimated above 8%, which corresponds to a 6x lease multiple. The change in the multiple had positive implications for Tattel's FFO adjusted net leverage, reducing it by approximately 0.2x-0.3x.
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, OJSC Svyazinvestneftekhim (SINEK; BB+/Negative), 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.
Fitch's key assumptions within our rating case for the issuer include:
- Stable market positions in fixed-line segment
- Mobile subscriber market share increases to 8% by 2019 (2% at the end of 2015)
- Annual revenue growth in low-mid single digits in 2017-2019
- EBITDA margin just below 30% in 2016-2018 due to the drag from mobile segment development
- Mobile segment to become EBITDA-breakeven in 2019
- Capex intensity at 19-20% of revenue in 2016-2019
- Dividend payments of around RUB230-240m per year in 2016-2019
Negative: Future developments that could lead to negative rating action include:
-A rise in leverage to above 2.5x FFO adjusted net leverage on a sustained basis.
-Cash flow pressures driven by revenue and market share losses, particularly in the broadband and mobile segments.
-A deterioration in liquidity or higher refinancing risk.
Rating upside is constrained by the company's small size, its lack of geographical diversification, and limited access to capital markets.
Tattel secured credit lines of total amount of RUB2.9bn at YE15, which almost fully cover company's existing debt. This implies a notable improvement in liquidity as previously the company had credit lines covering debt maturities for less than one year. Historically, liquidity risks at Tattel have been mitigated by strong relationships with local banks and potential support from the controlling shareholder as well as by the company's flexibility to reduce capex.
|Full company name||Tattelecom|
|Country of risk||Russia|
|Country of registration||Russia|