The credit rating of T2 RTK Holding LLC (the Company) is based on the medium leverage and coverage, medium cash flow, and moderate liquidity. The rating is supported by the Company's large size, high profitability, strong business profile, and high level of corporate governance.
ACRA notes the positive dynamics in all the key operating and financial metrics demonstrated by the Company in 2019 and expects that the positive trends will persist in 2020–2022, which is the reason for the change in the rating outlook.
The Company is a mobile operator ranking 4th in subscriber base and revenue in Russia. The Company's sole shareholder is PJSC Rostelecom (ACRA rating: AA(RU), outlook Stable).
Key rating assessment factors
The medium leverage and coverage. The ratio of total debt / FFO before net interest amounted to 2.3x in 2019 against 3.2x in 2018, which is caused mainly by a 46% increase in the FFO before net interest. This growth, along with the declining key rate, allowed the Company to increase the coverage for interest payments because a significant portion of the Company's liabilities is floating rate loans. In 2019, the ratio of FFO before net interest to net interest amounted to 4.5x vs 3.9 a year earlier.
As regards its leverage calculations, ACRA continues to adhere to the multiplier method, taking into account operating leases. Therefore, the ratio of total debt adjusted for operating leases to FFO before fixed charges was 2.8x at the end of 2019, and the ratio of FFO to fixed charges to fixed charges was 2.9x, which indicates a medium leverage. In 2020–2022, we expect the Company's leverage to decrease slightly, subject to a moderate increase in the cash flow and the absence of significant dividend payments.
The moderate liquidity and medium cash flow. The Company's debt repayment schedule does not imply significant cash outflows in 2020–2022. The main repayments will start in 2023, including the loans provided by VTB Bank (PJSC), the key lender of the Company. A significant volume of loan commitments is available to the Company. Moreover, the Company's FCF margin is good, which allows it to go through all current repayments quite comfortably and maintain capital expenditures at about 18–20% of revenue. Although the Company did not pay dividend for several years, ACRA is of the opinion that, if the financial indicators stabilize at the current levels and the FCF remains positive, the Company will begin to pay dividends in the coming years.
The 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 / 4G). ACRA notes that the geography of the Company's operations is wide. At the federal level, the Company is ranked 4th in the number of subscribers, and its market share is about 18%. 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 (although the internal risk management regulations contain no restrictions on borrowings in foreign currencies). The Company composes its IFRS financial statements annually, but it has not published such statements since 2016. On the other hand, the Company publishes, on a quarterly basis, press releases that include its key financial and operating indicators.
The large size and high profitability. The average annual growth in the Company's subscriber base amounted to 4.8% in 2018–2019. By December 31, 2019, the number of subscribers reached 44.6 million. This growth was accompanied by an increase (+8.3% in 2019, according to ACRA's estimates) in the monthly average revenue per user (ARPU), which gave a 14% increase in revenue in 2019. Last year, the Company's FFO before fixed charges and taxes grew faster that the revenue, which resulted in higher returns. The FFO margin before fixed charges and taxes was at 47% (vs 39% in 2018). ACRA expects that in 2020–2022, the growth in the Company's subscriber base, ARPU, revenues, and FFO before fixed charges and taxes will continue, but at a slower pace
- Revenue growth outrunning the market average due to growing subscriber base and ARPU;
- The substantial amount of undrawn credit lines to remain unchanged;
- The Company's capex to remain within RUB 35–37 bln.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- The FFO margin before fixed charges and taxes stabilizing above 40%;
- 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 exceeding 5%.
A negative rating action may be prompted by:
- The ratio of total debt adjusted for operating 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 and a zero growth in the subscriber base;
- Deteriorating structure of debt obligations;
- Significantly deteriorating access to external sources of liquidity;
- A significant growth in capex.
Standalone creditworthiness assessment (SCA): a.
Bonds issued by Tele2-Saint-Petersburg OJSC (RU000A0JRKC4), maturity date: June 11, 2021, issue volume: RUB 5 bln — A-(RU).
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 instruments 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 Tele2-Saint-Petersburg OJSC 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. To assign credit ratings to the above-mentioned 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 T2 RTK Holding LLC and the bonds (ISIN RU000A0JRKC4, RU000A0JS3L9) issued by Tele2-Saint-Petersburg OJSC 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 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.