Fitch Affirms Russia's MegaFon Debt Ratings with a Stable Outlook

Published on: 16th Jul 2013

Fitch Ratings has affirmed the long term debt ratings at Russia's MegaFon at 'BB+' with a Stable Outlook.

?Fitch said that MegaFon's business and financial profile corresponds to an investment-grade rating on a standalone basis likely mapping to a 'BBB' level. This is notched down reflecting Russian country-wide governance concerns but also MegaFon's specific corporate governance and shareholding situation. Alisher Usmanov is the ultimate controlling shareholder in MegaFon and can exert significant influence on the operator.

MegaFon can therefore be viewed as a private Russian company with a 15% public free float.

MegaFon is the second-largest mobile operator in Russia by subscribers. In view of the company's good network quality and sufficient LTE spectrum, Fitch believes that MegaFon will be able to maintain its strong competitive positions. The company benefits from operating in a modestly growing market, which should support its headline revenue growth.

MegaFon has been able to gradually increase its market shares and further gains are likely, although at a diminishing pace. MegaFon has invested more than its peers, which has ensured its leading positions in the mobile internet sector. A propensity to invest may change under the new ownership, but prior years' capex and an achieved network edge over peers should continue to help increasing the company's market share.

MegaFon controls more spectrum than any other operator in Russia, which guarantees its data future for years to come. The company received cost-efficient 800Mhz frequencies, as one of the four winners in the all-Russia LTE spectrum auction in July 2012.

Shareholding A Concern

MegaFon is unlikely to be protected from a potential negative influence by AF Telekom, its majority shareholder. The latter company is ultimately controlled by Mr. Usmanov who is a principal shareholder of JSC Holding Company Metalloinvest (BB-/Stable), for which Fitch assesses corporate governance at below its peers average.

Shareholder Friendly Distribution Policy

The announced dividend policy of paying the larger of 50% of net income or 70% of cash flow is likely to push down the free cash flow (FCF) margin to around 3%-4%. Although this is not a concern on its own, any acquisitions or expansion into new segments and geographic markets would probably require debt funding, triggering a spike in leverage.

Moderate Leverage Sustainable

MegaFon generates sufficient cash flow to fund organic development, so that the company's leverage is likely to remain relatively moderate, close to the upper bound of its stated target of between 1.2x and 1.5x net debt(ND)/EBITDA. Leverage is not a concern. The company retains flexibility to increase leverage up to 3x FFO adjusted net leverage within the current rating level, provided that liquidity is strong and there are no concerns about refinancing issues.

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Tags: [megafon]? [fitch ratings]? [alisher usmanov]? [Russia]?

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