(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed OJSC Tattelecom's (Tattel)Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB' andShort-term currency IDR at 'B'. The Outlook on the Long-term Issuer DefaultRating is Stable.
Tattel's ratings reflect its well-established positions of a regional fixed-lineincumbent dominating in the traditional telephony and broadband segments, lowleverage and robust free cash flow generation. However, the company's small sizecould potentially limit its financial flexibility. In addition, liquiditymanagement is aggressive, exposing the company to short-term refinancing risks.
Tattel has been able to successfully defend and even grow its market shares,most notably in the broadband segment, despite the fierce competitiveenvironment. Fitch believes that the company is likely to continue eating intoits peers' market shares, capitalising on its good quality network and adedicated regional focus. As a result, the company is facing positive revenuegrowth prospects, at least in the short to medium term.
Tattel improved its broadband market share by almost 5% yoy in 2011 adding morenew customers than all other operators combined. The company launched IP-TVservice at end-2009 and managed to seize a decent market share over a short-timespan with good prospects for further progress in the pay TV segment.
Fibre upgrades should allow the company to stay ahead of the competition interms of network quality. Tattel is rapidly rolling out fibre upgrades on itsnetwork aiming to cover all multi-storey residential houses by end-H113. Theproject investments have been moderate so far while yet to be incurred projectcosts are not expected by Fitch to drive a leverage spike.
Tattel's leverage was low at 1.0x ND/EBITDA and 1.3x FFO adjusted leverage atend 2011, and Fitch expects it to remain relatively modest. The company'sdividend policy of paying 30% of net profit by Russian accounting standards andthe management's focus on high capex efficiency (as measured by such benchmarksas capex per newly constructed line) will drive strong free cash flow generationand deleveraging flexibility.
Tattel's liquidity is insufficient to cover its 2013 debt maturities, which is aconcern. No progress with finding sufficient liquidity sources to cover nextyear's maturities by early 2013 may prompt a negative rating action. Tattel'sliquidity situation is mitigated by strong relationships with local banks,flexibility to reduce capex and increase cash flow from operations at shortnotice, and potential liquidity support from the company's controllingshareholder, OJSC Svyazinvestneftekhim (SINEK) ('BBB-'/Stable). Refinancingefforts will be helped by the company's overall low leverage and the fact that apotential liquidity gap is only a small fraction of the company's annual EBITDA.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead tonegative rating action include
- A rise in leverage to above 2.25x FFO adjusted net leverage - Liquidity pressures
- Pronounced revenue pressures driven by market share losses, particularly inthe broadband segment.
Positive: Further rating progress is restrained by the small size of thecompany's business , lack of geographical diversification, aggressive liquiditymanagement and limited access to capital markets.