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Fitch revises Sistema's outlook to positive

Fitch Ratings revised the Outlook on Sistema Joint Stock Financial Corp.'s (Sistema) Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB-', the rating agency informed.

The long-Term IDR is affirmed at 'BB-', Outlook revised to Positive from Stable. The local currency Long-Term IDR is affirmed at 'BB-, Outlook revised to Positive from Stable.

The Loan Participation Notes issued by Sistema Funding S.A. and guaranteed by Sistema are affirmed at 'BB-'

The revision of the Outlook reflects significant deleveraging at the holdco level and expectations of continuing stable dividends from key subsidiaries, which should be sufficient to resolve legacy support issues for weaker parts of the group.

Sistema is a diversified holding company with its key assets being controlling stakes in OJSC Mobile TeleSystems (MTS; BB+/Positive), a large telecoms operator in Russia and CIS, and Joint Stock Oil Company Bashneft (Bashneft; BB/Positive), a medium-sized Rissian oil company. Sistema's credit profile is shaped by its ability to control cash flows and extract dividends from these two key subsidiaries. These positives are overlaid by a significant debt burden at the holdco level including exposure to substantial off-balance-sheet liabilities through its subsidiaries and potential support requirements for weaker assets of the group.

In Fitch's view, Sistema's key operating subsidiaries, MTS and Bashneft generate strong free cash flow (FCF) supporting their ability to pay large dividends. Sistema can effectively control the cash flows of these subsidiaries and shape their dividend policy.

In view of both MTS's and Bashneft's low leverage and stable operating performance, they retain flexibility to upstream significant additional dividends without jeopardising their ratings. On a standalone basis, MTS's credit profile is consistent with low investment grade level. Fitch estimates that Sistema may extract up to USD4bn in extra dividends, which would be sufficient to address any debt issues at the holdco level and provide necessary financial support to its weaker subsidiaries.

Sistema adopted a new strategy in 2013, which aims to transform the company into a diversified investment holding company, with a focus on receiving stable dividends and monetising its investments and less emphasis on operating control. However, Fitch notes that material dividend diversification may only be achievable in the long term, and expect that Sistema will continue to depend on dividends from MTS and Bashneft as a key recurring income stream in the short to medium term at least.

Diversification benefits will likely come at a price of lower control over the investments' cash flows if Sistema's portfolio composition changes to minority stakes. As an investment holding company, Sistema will remain intrinsically exposed to high M&A risks.

Sistema guarantees some debt of its subsidiaries, most notably Sistema Shyam TeleServices (SSTL) in India. On a positive note, this subsidiary's debt had significantly reduced to USD621m at end-September 2013 from USD1,574m at end-2011with Sistema's help. SSTL significantly downsized its operations and scaled down its development ambitions in India with the aim of becoming EBITDA break-even by 1Q15. Fitch believes this will limit the amount of additional support required from Sistema.

The holdco also granted a number of equity put options, which effectively turn these instruments into debt recourse to Sistema, increasing its leverage.

Some of Sistema's operating subsidiaries are fairly weak credits, and some are highly leveraged, most importantly in the high-tech segment, and may require financial support from the parent. Although Sistema is not contractually committed to provide this support, additional reputational/strategic considerations may apply.

A sale of the minority 49% stake in Russneft for USD 1.2bn in 2013 allowed Sistema to notably delever at the holdco level. Fitch expects that dividends from MTS and Bashneft will be sufficient to gradually reduce off-balance sheet liabilities and sort out legacy support requirements for weak subsidiaries.

Fitch believes that a reduction in off-balance-sheet liabilities and sustained deleveraging at the holdco level to below 2.5x net debt including off-balance-sheet liabilities to normalised dividends may be positive. This is likely to be achieved through limiting Sistema's exposure to further losses and debt increases at Shyam and re-organisation of the technology segment so that it becomes capable of sustainably servicing its debt without parental support.

A protracted rise in this metric to above 4.5x may lead to negative rating action. A portfolio reshuffle increasing the share of subsidiaries with low credit profiles could also be rating negative.

Sistema Joint-Stock Financial Corporation (Sistema JSFC, tax number: 7703104630) is a public diversified corporation providing services to more than 100 million consumers related to the following industries: telecommunications, high technologies, fuel and energy, radio and space technologies, banking services, retail trade, mass media, tourism and medical services. The company was established in 1993.

The authorized capital of Sistema JSFC is RUB 868.5 million represented by 9.65 billion common shares at par value of RUB 0.09. Vladimir Evtushenkov, the company's BOD Chairman, holds 64.18% of shares, Deutsche Bank Trust Company Americas holds 19% of shares.

Net profit Sistema JSFC as per US GAAP in Q2 2013, according to the company's unaudited statement, was $527.9 million against a loss of $162.8 million for the same period in 2012. Net profit without one-off adjustments decreased by 8.1% to $345.1 million from $375.6 million. Consolidated revenue grew by 6.7% to $8.473 billion from $7.941 billion, OIBDA without one-off adjustments increased by 9.4% to $2.13 billion from $1.948 billion, OIBDA margin without one-off adjustments to 25.1% from 24.5%.

According to the DataCapital information retrieval system, RAS net profit of Sistema JSFC for January-September 2013 grew by 2.67% to RUB 101.748 billion from RUB 99.101 billion for the same period in 2012. Revenue decreased by 39.48% to RUB 15.96 billion from RUB 26.37 billion, GP by 39.39% to RUB 15.937 billion from RUB 26.296 billion, sales profit by 51.97% to RUB 11.498 billion from RUB 23.939 billion, pre-tax profit increased by 11.26% to RUB 109.888 billion from RUB 98.769 billion.

"AK&M", 27.02.2014 14:51


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