The credit rating of T2 RTK Holding LLC (the Company) has been upgraded on the positive dynamics in the operating and financial metrics and better coverage and leverage demonstrated by the Company in 2018. The Company is assessed as a large-scale company, characterized by the high operating profile assessment, high profitability, and medium liquidity position.
The Company is a mobile operator ranking 4th in terms of subscriber base and revenue in Russia. Currently, the Company shareholders include PJSC Rostelecom (45%) and Tele2 Russia Holding AB (55%), through which the Company's shares are held, as far as the Agency is aware, by PJSC Bank VTB (27.5%), INVINTEL B.V. controlled by Alexey Mordashov (22%) and ABR Investments B.V. (5.5%) controlled by BANK "ROSSIYA."
Key rating assessment factors
The leverage assessment has declined from high to medium. The total debt / FFO before net interest ratio declined to 3.17x in 2018 against 4.24x in 2017, which is caused mainly by a 35% increase in the FFO before net interest, while the volume of debt has remained virtually unchanged. The Company's debt obligations are denominated in rubles and a significant portion of them are floating interest rate obligations. The ratio of debt adjusted for operating lease to FFO before fixed charges has decreased from 4.3x to 3.2x in 2018, and this ratio may decline to 2.5–2.7x in the next three years. The Company's coverage has grown up to the medium level: the ratio of FFO before fixed charges to fixed charges went up to 3.75x in 2018 (2.33x in 2017). The Agency is of the opinion that the ratio may go up to 3.9–4.0x in the forecast period (2019–2021).
Liquidity deteriorating due to substantial repayments expected in 2019–2020.
A significant portion of the loans borrowed by the Company will become due in 2019 and 2020 (25% and 34%, respectively), which is negative for the liquidity assessment. ACRA notes that the Company's debt includes mainly loans borrowed from shareholder banks (73%), which reduces the refinancing risks to some extent. In addition, the Company's liquidity is supported by the significant amount of undrawn credit lines.
High operating profile assessment is underpinned primarily by the strong business profile of the Company. In providing mobile phone and Internet services, the Company operates its own telecommunications infrastructure that supports various technologies (2G, 3G and 4G). ACRA notes that the geography of the Company's operations is wide and includes 67 regions of the Russian Federation. At the federal level, the Company's market share lags behind the three largest players. According to ACRA estimates, in 2018, the market share of the Company was about 17%, which is almost twice lower than the share of the market leader PJSC "MTS." ACRA assesses the quality of corporate governance as high. The Company has developed and implements the strategy for the period from 2018 to 2022. The shareholding structure is transparent, and the risk management functions are structured and formalized (however, the internal risk management regulations contain no restrictions on borrowings in currencies other than the currency of revenue). The Company composes its IFRS financial statements annually, but it has not published such statements since 2016. On the other hand, the Company publishes, in a quarterly basis, press releases that include its key financial and operating indicators.
Large-sized company with high profitability. The average annual growth in the Company's subscriber base amounted to 4.2% in 2017–2018. By December 31, 2018, the number of subscribers reached 42.3 million. This growth was accompanied by an increase in the monthly average revenue per user (ARPU) (+11.5% in 2018), which resulted in a 16.4% revenue increase in 2018. Last year, the Company showed a 44% increase in the FFO before fixed charges and taxes up to RUB 43.6 bln.
In 2019–2021, we expect that the growth in the Company's subscriber base, ARPU, revenues, and FFO before fixed charges and taxes will continue, but at a slower pace. Similar to 2017, the Company has managed to maintain its profitability high in 2018. The FFO margin before fixed charged and taxes reached 31% in 2018. We believe that in 2019–2021, the margin will remain close to its current level.
Free cash flow is low, which is caused by the considerable expenses under the corporate investment program. In 2018, the Company increased its capex (against 2017), which pushed the free cash flow (FCF) down, and the FCF margin declined from 6% to 1%. According to ACRA estimates for 2019–2021, the Company's capex will grow further, which will continue to put pressure on the FCF margin. An additional pressure on the cash flow may come from the debt financing required for PJSC Rostelecom to repurchase the Company shares held by other shareholders. As the common market practices show, in case such scenario becomes true, the Company is likely to pay dividend to its parent company, which may further reduce its FCF.
- Revenue growth outrunning the market average, based on growing subscriber base and ARPU;
- The substantial amount of undrawn credit lines will remain unchanged;
- The aggregate expenses required to comply with the new regulations (amendments introduced to the Federal Law "On Countering Terrorism" and the Criminal Code of the Russian Federation) will be in the range of RUB 20–25 bln in 2019–2020.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- The ratio of total debt adjusted for operating lease to FFO before fixed charges declining below 2.0x or the ratio of FFO before fixed charges to fixed charges growing above 5.0x;
- The FCF margin going up to 2%.
A negative rating action may be prompted by:
- The scenario where the parent company repurchases the Company's shares, which may affect the creditworthiness of the Company;
- The ratio of total debt adjusted for operational lease to FFO before fixed charges growing above 3.5x or the ratio of FFO before fixed charges to fixed charges declining below 2.5x;
- Shrinking annual average ARPU amid zero growth in the subscriber base;
- Deteriorating structure of debt obligations;
- Significantly deteriorating access to external sources of liquidity;
- A significant growth in the aggregate expenses required to comply with the new regulations (amendments introduced to the Federal Law "On Countering Terrorism" and the Criminal Code of the Russian Federation) in 2019–2020.
Standalone creditworthiness assessment (SCA): a.
Certificated interest-bearing non-convertible bearer bonds issued by Tele2-Saint-Petersburg OJSC (RU000A0JRKC4), maturity date: June 11, 2021, issue volume: RUB 5 bln — A-(RU).
Certificated interest-bearing non-convertible bearer bonds issued by Tele2-Saint-Petersburg OJSC (RU000A0JS3L9), maturity date: January 31, 2022, issue volume: RUB 4 bln — A-(RU).
Credit rating rationale. Bond issues (ISIN RU000A0JRKC4, RU000A0JS3L9) are senior unsecured debt of Tele2-Saint-Petersburg OJSC (the Issuer), a subsidiary of T2 RTK Holding LLC (the Group). The bonds were rated following a public irrevocable offer from T2 RTK Holding LLC, the holding company of the Group. The Issuer is an operating company of the Group, but its share in the Group's returns is not high. In the absence of a direct guarantee from Т2 Mobile LLC, the main operating company, the Issuer's senior unsecured debt is deemed subordinate to other financial liabilities of the Group. According to the ACRA methodology, the reimbursement rate for Issuer's unsecured debt belongs to Category III, and therefore, the bond issues are rated A-(RU), i.e. one notch lower than the credit rating of T2 RTK Holding LLC.
The credit ratings of T2 RTK Holding LLC and the bonds (ISIN RU000A0JRKC4, RU000A0JS3L9) issued by T2 RTK Holding LLC were assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also used in the credit rating process.
The credit ratings assigned to T2 RTK Holding LLC and the bonds (ISIN RU000A0JRKC4, RU000A0JS3L9) issued by T2 RTK Holding LLC were first published by ACRA on June 9, 2018, July 11, 2018 and July 11, 2018, respectively. The credit rating of T2 RTK Holding LLC and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the publication date of this press release.
The assigned credit ratings are based on the data provided by T2 RTK Holding LLC, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and T2 RTK Holding LLC participated in the rating process.
No material discrepancies between the provided data and the data officially disclosed by T2 RTK Holding LLC in its financial statements have been discovered.
ACRA provided no additional services to T2 RTK Holding LLC. No conflicts of interest were discovered in the course of credit rating process.