The credit rating of PJSC «MegaFon» (hereinafter, the Company or MegaFon) is based on its medium leverage, very large scope and very high profitability, strong business profile and strong liquidity position, as well as a very high level of corporate governance and moderate cash flow.
PJSC «MegaFon» is one of the largest telecommunications companies in Russia. It ranks second in terms of the number of subscribers and revenue among mobile communications providers in the country.
Key rating assessment factors
Debt load remains medium. MegaFon completed a program to buy back its shares fr om minority investors through its wholly owned subsidiary MegaFon Finance LLC. The raising of funds required to finance this transaction led to an increase in the Company’s total debt (which apart from bank and bond loans includes other financial instruments, according to the Agency’s approach) from RUB 328 bln as of December 31, 2018, up to RUB 384 bln as of the end of Q1, 2019. According to the ACRA forecast, the ratio of total debt to FFO (funds from operations) before net interest payments will amount to 2.85x by the end of 2019 (compared to 2.68x as of December, 31, 2018). According to ACRA estimates, the ratio of debt adjusted for operating lease to FFO before fixed charges will grow from 3.04x in 2018 to 3.13x in 2019. The FFO before fixed charges to fixed charges ratio will decrease from 4.7x to 3.7x in the same period. ACRA continues to assess the Company’s debt load as medium, although it has approached the upper lim it of the current range. At the same time, ACRA expects a gradual decrease in the Company’s debt load due to the stably positive free cash flow (FCF) and given that there are no plans for the dividend payout. As a result, the Agency expects the ratio of debt adjusted for operating lease to FFO before fixed charges to fall below 3.0x by 2021 and the FFO before fixed charges to fixed charges ratio to rise to 4.4x.
Strong liquidity position and moderate free cash flow. MegaFon’s refusal to pay dividends for 2017 and 2018 has been positive for its cash flow. On the other hand, the cash flow is under pressure of capital expenses (CAPEX), which rose fr om 17% to 24% of revenue in 2018. The CAPEX to revenue ratio can stabilize at 20-22% of revenue in the next three years. According to ACRA estimates, FCF margin decreased to 2% at the end of 2018 vs. 7% in 2017. FCF margin is expected to reach 8-9% in the next three years, according to the ACRA forecast. The positive FCF and significant amounts from credit lines available for disbursement allowed MegaFon to make payments for the share buyback with no deterioration in the Company’s liquidity position, which the Agency continues to assess as strong.
Very large scope and very high profitability. MegaFon ranks second in terms of the number of subscribers and revenue among Russian mobile communications providers. In 2018, the Company’s revenue amounted to RUB 335.5 bln and FFO before fixed charges and taxes to RUB 151.3 bln. The subscriber base comprises 77.0 million people. The average revenue per user (ARPU) is lower than that demonstrated by peers, however, MegaFon remains one of the leaders among Russian federal-level communications providers in terms of margin. FFO margin before fixed charges and taxes was 45% in 2018. ACRA expects the Company’s margin to remain at a comparable level in 2019–2021.
Strong business profile and wide geography of operations. MegaFon benefits from the state-of-the-art telecommunications infrastructure it owns. The Company operates the 204,400 km long trunk network and 169,500 base stations supporting various communications standards. As of end-2018, 4G network covered 83 regions and 79% of the country’s population. Currently, the Company is involved in 5G standard development and testing. MegaFon operations are focused on the mobile communications services, which comprise 82.3% of the 2018 revenue (30.1% of revenue accounted for mobile data services).
Key assumptions
- ARPU shrinking annually by not more than 3%;
- Stabilization of the Company’s debt load at the current level;
- Subscriber base to remain stable;
- No one-off, substantial expenditures required to comply with new requirements to communications providers (amendments in the Federal Law “On Counteracting Terrorism” and in the Criminal Code of the Russian Federation).
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:
- Declining debt adjusted for operating lease to FFO before fixed charges ratio below 2.0x and advancing FFO before fixed charges to fixed charges ratio above 5.0x.
A negative rating action may be prompted by:
- Increasing debt adjusted for operating lease to FFO before fixed charges above 3.5х;
- Negative FCF caused by dividend payments and shares buyback in 2018–2019;
- Annual decrease of ARPU by over 3% or subscriber base by over 5%;
- Declining FFO margin before fixed charges and taxes below 40%;
- Access to external liquidity sources worsening considerably;
- Deteriorating corporate governance practices (including information transparency).
Rating components
Standalone creditworthiness assessment (SCA): aa.
Adjustments: none.
Issue ratings
PJSC «MegaFon» (RU000A0ZYC98), maturity date: October 3, 2022, issue volume: RUB 15 bln, — AA(RU).
PJSC «MegaFon» (RU000A0ZYTM6), maturity date: February 15, 2021, issue volume: RUB 20 bln, — AA(RU).
PJSC «MegaFon» (RU000A1002P4), maturity date: January 31, 2022, issue volume: RUB 20 bln, — AA(RU).
PJSC «MegaFon» (RU000A1006G4), maturity date: March 11, 2024, issue volume: RUB 5 bln, — AA(RU).
PJSC «MegaFon» (RU000A1006H2), maturity date: March 11, 2024, issue volume: RUB 5 bln, — AA(RU).
PJSC «MegaFon» (RU000A1009A1), maturity date: April 6, 2026, issue volume: RUB 10 bln, — AA(RU).
Credit rating rationale. The issues represent senior unsecured debt of MegaFon. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to the ACRA methodology, the credit rating of the issues is equivalent to that of MegaFon, i.e. AA(RU).
Regulatory disclosure
The credit ratings were assigned to PJSC «MegaFon» and bonds (RU000A0ZYC98, RU000A0ZYTM6, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» 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. To assign a credit rating to the above bond issues the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.
The credit ratings assigned to PJSC «MegaFon» and bonds (RU000A0ZYC98, RU000A0ZYTM6, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» were first published by ACRA on September 21, 2017, October 9, 2017, February 19, 2018, February 4, 2019, March 18, 2019, March 18, 2019, and April 15, 2019, respectively. The credit rating of PJSC «MegaFon» and its outlook and the credit ratings assigned to bonds (RU000A0ZYC98, RU000A0ZYTM6, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» are expected to be revised within one year following the publication date of this press release.
Disclosure of deviations from approved methodologies: the profitability factor was assessed with a deviation from the assessment range as specified in the methodology, as ARPU of PJSC «MegaFon» remains lower than that of its direct competitors, although it is close to the lower lim it of the ultimate assessment of the relevant subfactor.
The credit ratings were assigned based on the data provided by PJSC «MegaFon», information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements and management reporting of PJSC «MegaFon». The credit ratings are solicited, and PJSC «MegaFon» participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by PJSC «MegaFon» in its financial statements have been discovered.
ACRA provided additional services to PJSC «MegaFon». No conflicts of interest were discovered in the course of credit rating assignment.
