The credit rating of Unitel LLC (hereinafter, Unitel, or the Company) is based on the medium assessment of the operational risk profile (due to the Company’s weak market position and geographic diversification and medium assessments of corporate governance and the business profile), as well as the weak assessment of the financial risk profile, which reflects the small size of business, medium profitability and leverage metrics, low assessment of debt service, and weak liquidity and free cash flow (FCF). The rating is supported by a high assessment of the industry risk profile, reflecting the low cyclicality of the Company’s business and overdue debt on average in the banking system, and a high volume of investments used to build the Company’s own telecommunications infrastructure. The rating takes into account the uncertainty surrounding the Company’s plans regarding M&As in 2024 and their potential impact on business profitability.
Unitel is a universal operator of telecommunications services for businesses (B2B) in Saint Petersburg and the Leningrad Region.
KEY ASSESSMENT FACTORS
High assessment of the industry risk profile and medium assessment of the operational risk profile. The Agency views the Company as a competitive player in the fragmented B2B telecommunications market in the regions of presence. At the same time, ACRA takes into account the fact that barriers to entering the market are quite high, and demand for the Company’s services has low cyclicality and elasticity. In addition, companies of the telecommunications industry have low overdue debt on average in the banking system. At the same time, the industry is characterized by rather strong competition, while active development of technology requires that companies maintain a substantial level of capital expenditures. When assessing the industry risk profile, ACRA took into account the significant share of the Company’s revenues attributable to construction and installation work as part of the implementation of government contracts regarding the construction of communication networks.
The Company’s business is high-tech, which demands special attention to maintaining the quality and continuity of services. In connection with this, Unitel strives to use equipment provided by the largest vendors. The Company currently has over 850 km of fiber optic communication lines, more than ten large backbone nodes, and over 80 communication nodes in commercial real estate.
Unitel also uses equipment under partnerships with competitors. The Company successfully handled equipment supply challenges during the pandemic and amid restrictions imposed by unfriendly countries in 2022. Unitel plans to continue upgrading its network and developing new smart services for clients.
The Company’s infrastructure belongs to a technological generation that partially corresponds to the latest developments, which, in the Agency’s opinion, can contribute to expanding the range of services provided. Unitel enjoys strong diversification of services. The main segments for the Company are broadband access (29%), fixed line services (6%), network infrastructure (15%), and various solutions in the field of telematics, cloud solutions and mobile communications. 77% of the Company’s revenues is generated by the B2B segment, while the remaining 23% comes from the B2G segment.
When assessing corporate governance, ACRA took into account the considerable engagement of shareholders in the Company’s operations, simple structure of business amid the presence of related-party transactions (in the form of debt financing received by the Company), which in the Agency’s opinion is economically justified, as well as the presence of a risk management strategy and system that are currently under development.
Small size of business and medium profitability. According to the Agency’s estimates, the Company’s revenues will amount to RUB 278 mln in 2023. Taking into account the plan to acquire a competitor for RUB 60 mln (at the expense of a planned bond issue) and potential growth of the client base, the Company’s revenues may increase to RUB 360 mln in 2024–2026. According to ACRA’s estimates, the Company’s weighted average FFO before fixed payments and taxes from 2024 to 2026 will be RUB 70 mln, which corresponds to a very low assessment of size as per the Agency’s methodology. ACRA estimates the weighted average FFO margin before fixed payments and taxes for this period at 22%, which indicates moderate business profitability. According to ACRA’s projections, the Company’s ARPU (average revenue per user) may amount to RUB 14,600 in 2023, which is close to the industry average for the B2B segment in the Company’s regions of presence.
Medium leverage and low interest payment coverage. The Company’s debt is primarily made up of short-term credit lines and loans from related parties. The Company’s total debt is RUB 68 mln, residual obligations under leasing agreements are about RUB 4.5 mln. The Agency factors in the plans to place bonds worth RUB 150 mln into its forecast of leverage in 2023 and the forthcoming years. ACRA assesses the Company’s leverage and debt service as medium and low, respectively. According to the Agency’s assessments, the ratio of adjusted total debt to FFO before fixed payments in 2023 will be 3.44x, while FFO before fixed payments to fixed payments will be 1.79x.
Medium liquidity assessment and weak cash flow assessment. In 2022, FCF was negative (the FCF margin was -3.2%) due to the low cash from operations (CFO) and relatively high capital expenditures on the back of a phase of active growth of the Company. Taking into account plans for further investments in equipment, ACRA expects negative FCF and a negative FCF margin to be maintained in 2023–2024. The ratio of capital expenditures to revenues will exceed 20% in that period, according to the Agency’s estimates.
The Agency determined the qualitative assessment of liquidity as low due to the Company’s sole dependence on bank financing and loans from related parties.
KEY ASSUMPTIONS
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Revenues at RUB 280–300 mln in 2023;
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Ratio of FFO before fixed payments to fixed payments at 1.8–2.2x;
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RUB 150 mln bond issue being placed in full;
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No dividend payments in 2023–2025;
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The Company receiving access to new liquidity sources.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Ratio of adjusted total debt to FFO before fixed payments declining to 2.0x coupled with improvement in the qualitative leverage assessment;
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FCF and weighted average FCF margin turning positive;
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Financial transparency improving and better corporate and strategic management practices.
A negative rating action may be prompted by:
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The Company losing its telecommunications license;
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Ratio of adjusted total debt to FFO before fixed payments increasing to 3.5x;
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Ratio of FFO before fixed payments to fixed payments falling below 1x;
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Deterioration of access to external liquidity sources.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bb-.
Support: none.
ISSUE RATINGS
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating has been assigned to Unitel LLC 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.
A credit rating has been assigned to Unitel LLC for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Unitel LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and Unitel LLC participated in its assignment.
Disclosure of deviations from approved methodologies: the ARPU sub-factor was assessed with a deviation from the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation because the assessments of this sub-factor in the methodology do not describe the specifics of the Company’s business segment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Unitel LLC. No conflicts of interest were discovered in the course of credit rating assignment.
