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16 Feb 2006
MOODY'S ASSIGNS (P)B3 RATING TO SITRONICS' PROPOSED NOTE ISSUANCE AND (P)B3 CORPORATE FAMILY RATING
London, 16 February 2006 -- Moody's Investors Service has today assigned a provisional (P)B3
corporate family rating to the Joint Stock Company Concern Sitronics ("Sitronics"
or "the company"). Concurrently, Moody's
assigned a provisional (P)B3 rating to the proposed notes of up to US$200
million to be issued by Sitronics Finance S.A. The outlook
on the ratings is stable.
Moody's issues provisional ratings in advance of the final sale
of securities, and these ratings only represent Moody's preliminary
opinion. Upon a conclusive review of the transaction and associated
documentation, Moody's will endeavour to assign a definitive
rating to the securities. A definitive rating may differ from a
The (P)B3 corporate family rating reflects the following credit weaknesses:
(i) significant event risk due to the company's intentions to continue
to grow through acquisitions; (ii) high business risk associated
with the company's operating activities in the technology sector;
(iii) the competitive nature of the markets in which the company operates;
(iv) the complex corporate structure due to a number of business lines,
their geographic dispersion and the presence of minority shareholders;
(v) relatively high leverage on a pro-forma 2005 EBITDA basis;
(vi) dependence on dividends and intercompany loan payments to service
the notes; and (vii) negative cash flow from operations for the first
nine months of 2005, although this is expected to have turned positive
for the quarter in Q4 2005.
More positively, the rating reflects the following credit strengths:
(i) the company's 94.5% ownership by JSFC Sistema
(rated B1/Stable) and the latter's recent equity contribution to
Sitronics' share capital; (ii) Sitronics' strong track
record of revenue and EBITDA growth; (iii) cross-selling opportunities
to other Sistema subsidiaries such as Mobile TeleSystems OJSC (rated Ba3/Stable)
and Moscow City Telephone Network PJSC (rated Ba3/Stable); and (iv)
the potential for growth given the increasing demand in Russia and the
CIS for technology products in industries such as telecommunications,
defence and banking.
Sitronics is anticipating strong revenue growth over the next three years
as a result of the combination of organic growth and acquisitions.
In 2006, M&A activities are expected to account for a significant
part of revenue and EBITDA. For example, Sitronics recently
announced the signing of a non-binding offer to purchase a 51%
stake in Intracom Telecom for approximately EUR120 million. The
(P)B3 rating factors in event risk within parameters currently assumed
in the company's business plan.
Sitronics' primary activity is technology business, which
inherently carries a relatively high business risk. The company's
info-communication division (represented by its two main subsidiaries
Strom Telecom a.s. and Closed Joint Stock Company Mediatel)
faces the ongoing challenges of keeping up with new developments in the
telecommunications industry with a view to offer products such as Next
Generation Networks, whilst Sitronics' information technology
business (represented by Kvazar-Micro Corporation B.V.
and its subsidiary companies) is aiming to increase its share in the system
integration market -- a more technologically demanding and higher-margin
business. In addition, the microelectronics division will
need to introduce more advanced technology for the production of microchips
and smart cards.
Sitronics is currently in the midst of a significant business transformation
entailing the launch of new products and technologies, its entry
into new markets (the CIS, other emerging markets such as India
and Brazil as well as markets in Western Europe and the USA) and changes
to its product mix in the existing businesses to increase profitability.
Moody's notes that this organic growth is associated with execution
risk with regard to the company's business plan, which could
result in revenue and EBITDA growth below levels as outlined in the plan.
Additionally, Sitronics will face integration risk as it continues
to grow through M&A activities.
Sitronics operates in highly competitive markets. For example,
in the info-communications market the company has to compete with
multinational companies such as Siemens, Alcatel, Ericsson
and Huawei. In its consumer electronics division, Sitronics
faces competition from domestic producers for low-priced products
as well as from international well-recognised producers for high-quality
products. Imports currently represent over 80% of all products
on the Russian consumer electronics market. Overall, Sitronics
has modest market shares in most of its product lines.
In Moody's view, Sitronics is highly leveraged for a company
with high business risk operating in the emerging markets. Following
the bond issuance, the company's leverage will be approximately
1.85x Total Debt to 2005 expected EBITDA. The absolute debt
level is expected to increase further in the course of 2006 mainly due
to the acquisition activity including debt associated with Intracom acquisition.
Moody's notes that in 2006 de-leveraging through improved
profitability will be largely underpinned by M&A activities,
thus creating some uncertainty as regards the company's financial
profile over the next 12 to 18 months.
Moody's notes that Sitronics generated negative free cash flow from
operations in 2003, 2004 and the first nine months of 2005.
However, the company has indicated that it anticipates that cash
flow from operations turned positive for the quarter in Q4 2005.
The (P)B3 corporate family rating assumes that Sitronics will generate
positive cash flow from operations going forward.
The (P)B3 rating is supported by Sitronics' 94.5%
ownership by Sistema, which recently made an equity contribution
to the company's share capital in the amount of approximately US$200
million. Due to Sitronics' expected revenue contribution,
the company falls under the definition of a principal subsidiary for cross-default
provisions in Sistema's borrowings.
The rating also reflects Sitronics strong revenue and EBITDA growth over
the past several years, although some of this growth is due to acquisitions.
Moody's believes that Sitronics is well positioned to benefit from
cross-selling to other Sistema subsidiaries such as MTS and MGTS.
For example, both companies are major customers of the info-communication
division. Sitronics' microelectronics division plans to sell
smart cards to Sistema's banking division once production commences.
Furthermore, Sitronics is well positioned to benefit from the growing
demand for technology products such as microchips for e-passports.
The stable outlook on the ratings assumes that the company's external
growth will be within the financial parameters as currently factored into
the rating. Furthermore, the ratings rely on Moody's
expectation that the company will de-leverage from its current
levels of debt over the next 12 to 18 months. In the event the
company does not turn operating cash flow positive or increases its debt
levels beyond the expectations currently embedded in the corporate family
rating, negative pressure on the rating could develop.
The (P)B3 rating on the bonds reflects dependence on dividend and intercompany
loan payments for debt service on the proposed bond issuance without previous
track record of such cash up-streaming. Moody's notes
that the majority of dividend payments are anticipated to derive from
the company's info-communication division and, over
the medium term, the information technology division.
At the same time, the proposed terms and conditions of the notes
limit debt incurrence at Sitronics' subsidiaries to 10% of
the company's consolidated debt. In the event that an acquired
subsidiary retains its debt after a specified period of time, it
has to provide a guarantee to the bonds, which will rank pari-passu
with its existing and future unsecured and unsubordinated debt obligations.
Sitronics, headquartered in Moscow, is a large diversified
group of technology companies with operations in Russia, Ukraine
and Eastern Europe. For the first nine months of 2005, the
company generated US$652.3 million in revenue and US$143.6
million in EBITDA on a consolidated basis.
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David G. Staples
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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