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Announcement:

Moody's Places Mobile TeleSystems' ratings on review for possible downgrade

Global Credit Research - 25 Jan 2011

London, 25 January 2011 -- Moody's Investors Service has today placed on review for possible downgrade the Ba2 corporate family rating (CFR), probability of default rating (PDR) and senior unsecured instrument ratings of Mobile TeleSystems OSJC ('MTS').

Rating Rationale

On 24 January 2011, MTS made an offer to purchase any and all of the outstanding USD400 million 2012 notes issued by Mobile TeleSystems Finance S.A. ('MTS Finance'), a wholly-owned finance subsidiary of MTS registered in Luxembourg, and guaranteed by MTS. At the same time noteholders were asked to consent to amendments to the Indenture dated 28 January 2005. The amendments would eliminate substantially all of the restrictive covenants as well as event of default and related provisions other than the covenant to pay interest and premium, if any, and the principal of the 2012 notes when due. Tendering of any notes automatically constitutes consent to the amendments. On the same day, the noteholders of the USD 750 million 2020 loan participation notes issued by MTS International Funding, another wholly-owned finance subsidiary of MTS, were asked to consent to the waiver of various specified clauses in the loan agreement to remove the potential for cross default with MTS Finance due to a failure to make a payment, as described below.

As per the documentation, the background to these actions is that a final award that was made by the London Court of International Arbitration on 5 January 2011 in favour of Nomihold Securities Ltd ('Nomihold') against MTS Finance in concluding the arbitration of a dispute in the amount of USD175.88 million plus interest and related costs. MTS Finance is considering its options with respect to making the payment to fulfil the terms of the award. However, a failure by MTS Finance to make the payment on or prior to 5 March 2011 might result in Nomihold suing MTS Finance, which could possibly lead to the bankruptcy, insolvency or bankruptcy-related reorganisation of MTS Finance. This in turn could give rise to an event of default under the terms of the indenture of the 2012 notes as well as the 2020 loan participation notes, or under the terms of other debt instruments. It is also possible that MTS Finance and/or MTS could be prevented from making timely payments of principal and/or interest due on the 2012 notes.

Although it is Moody's opinion that this transaction does not materially affect the capacity of the MTS group to service its financial debt and that the probability of material losses for creditors appears relatively modest at this point in time, there are execution risks and, in particular, there is no certainty of payment timeliness although Moody's believes that MTS is willing to fully service its financial debt. Furthermore, this is an unusual transaction and Moody's will assess during the review process whether the execution uncertainties or unintended consequences could have a negative effect on MTS's creditworthiness and its ratings. The review for possible downgrade will therefore focus on:

1) Understanding the implications of the transaction, particularly were it to fail, on MTS's creditworthiness

2) Investigating the likelihood that MTS could be prevented from making timely payments to the residual noteholders who do not choose to participate in the 2012 notes purchase

3) Assessing MTS's ability to handle any liquidity implications: (i) in a scenario where an event of default does occur, triggering cross default, with the possible result that most or all of its debt is accelerated; or (ii) in the aftermath of a potentially successful transaction

4) Reviewing management strategy in relation to financial policy and debt structure

Moody's will monitor the potential impact of this transaction on other rated group companies, including Comstar - United TeleSystems, Moscow City Telephone Network (MGTS) (PJSC) and majority shareholder Sistema Joint Stock Financlal Corporation, but views it as less likely and is not at present placing other group ratings on review for possible downgrade.

Moody's last rating action was implemented on 16 June 2010, when it assigned a (P)Ba2 senior unsecured instrument rating to notes being issued by MTS International Funding.

Moody's has used its methodology for the Global Telecommunications Industry, which can be found at www.moodys.com in the Ratings Methodology subdirectory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

MTS is a leading telecommunications group in Russia, Eastern Europe and Central Asia with last twelve months ('LTM') revenues to 30 September 2010 of USD11 billion and LTM EBITDA, as adjusted by Moody's, of USD4.4 billion (44.4% margin).

Debt Affected:

Mobile TeleSystems Finance S.A. senior unsecured notes due 2012, rated Ba2, LGD4/50%

MTS International Funding Limited loan participation notes due 2020, rated Ba2, LGD4/58%

London
Lynn Valkenaar
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Places Mobile TeleSystems' ratings on review for possible downgrade
No Related Data.
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