London, 23 September 2020 -- Moody's Investors Service ("Moody's") has today
assigned a long term issuer rating of Baa3 to Mobile TeleSystems PJSC
(MTS). As a result of today's assignment of an investment-grade
rating, Moody's has simultaneously withdrawn the company's corporate
family rating (CFR) of Ba1 and probability of default rating (PDR) of
Ba1-PD. Moody's has also upgraded the senior unsecured rating
of the $500 million notes issued by MTS International Funding Limited
to Baa3 from Ba1. The outlook on the ratings has been changed to
stable from positive.
"We have assigned an investment-grade rating to MTS based on our
expectation that the company will be able to sustain its strong operating
and financial performance, pursue a balanced financial policy,
adequately sizing capital spending and shareholder distributions,
and maintain robust liquidity," says Mikhail Shipilov, an
Assistant Vice President -- Analyst at Moody's.
RATINGS RATIONALE
Today's assignment of an investment-grade rating to MTS reflects
the company's strong business profile stemming from its leading
position in the Russian telecommunications market, robust operating
execution and expansion into complementary digital, media and financial
services. The rating action also factors in Moody's expectation
that the company will maintain its robust credit metrics as well as strong
liquidity. MTS' track record of adhering to consistent and
balanced financial policy, which prudently manages sizeable shareholder
distributions and capital spending needs, further supports its credit
quality.
MTS' operating and financial performance remains solid. The
company increased its revenue from telecommunications business (excluding
its PJSC MTS Bank and its discontinued operations in Ukraine) by 3%
a year on average between 2015 and 2019 despite intense competition in
its core Russian market. The company also managed to grow its revenue
base by 4% in the first half of 2020, compared with the same
period last year, despite a substantial reduction in international
roaming services and a partial closure of its retail outlets induced by
the pandemic. MTS' profitability, measured as Moody's
adjusted EBITDA margin, of 46%-48% is the highest
among its peers in Russia, also comparing favourably to its international
peers. Moody's expects the company's revenue to grow
by a low-single-digit in percentage terms in 2020-22
while its profitability to remain stable.
The rating agency also expects MTS to sustain its healthy credit metrics,
with Moody's adjusted debt/EBITDA remaining at around 2.4x-2.5x
in 2020-22 and interest coverage, measured as (EBITDA --
capital spending) / interest expense staying at around 2.7x-2.8x,
at the levels seen in the last 12 months ended 30 June 2020. However,
deleveraging below this level is unlikely in the near term because of
cash needs for ongoing investments into development of LTE networks and
new digital services, and considerable dividends.
The company has a strong track record of adhering to its prudent financial
policy, appropriately balancing capital spending and shareholder
payouts against stable and moderate leverage. The company views
1.5x of net debt/EBITDA on a pre-IFRS 16 reported basis
as comfortable which corresponds to around 2.0x for Moody's
adjusted net leverage, or 2.2x-2.4x on a gross
basis.
At the same time, the rating action takes into account MTS'
substantial shareholder distributions, including dividends and share
buybacks, which increased by 35% to RUB68 billion in 2019
from RUB51 billion in 2015. The payouts are likely to reach RUB90
billion in 2020 due to the payment of special dividends funded by the
proceeds from the disposal of the company's business in Ukraine,
and then to level off at around RUB50 billion in 2021 in line with its
dividend policy. Because the company is the major asset and source
of cash for its majority shareholder Sistema PJSFC (Sistema), the
latter shapes MTS' financial policy in a supportive way for sizeable
shareholder distributions. However, Moody's notes that
Sistema's evolving credit profile and cash needs have not led to the aggressive
financial management of MTS, while its risks and issues have not
spilled over to the telecommunications operator.
MTS' Baa3 rating also factors in its (1) largest and relatively
stable subscriber base in Russia, with 77 million users as of 30
June 2020, (2) well-invested mobile network; (3) expanded
product range, development of value-added offerings and new
digital services; (4) integrated business model and strong position
in the Russian fixed-line broadband and pay-TV market;
and (5) long-term debt maturity profile, with 6% of
debt repayments due through the end of 2021, 13% in 2022
and 82% thereafter.
However, MTS' credit quality is constrained by (1) the intense
competition in the Russian telecommunications market; (2) the geographical
concentration of MTS' operations in Russia; (3) the evolving regulatory
and competitive environment, including the implementation of the
so-called "Yarovaya law" and the potential introduction
of free access to socially important websites; (4) the company's
somewhat generous dividend policy which limits material improvement in
its credit metrics; and (5) its high exposure to Russia's less-developed
regulatory, political and legal framework.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Corporate governance considerations include the fact that MTS' controlling
shareholder Sistema shapes its financial and dividend policies,
which leads to relatively generous shareholder payouts, and has
historically involved MTS in large cash-funded asset transactions.
MTS' corporate governance risk is mitigated by the fact that it
is a listed company at the Moscow Exchange and the New York Stock Exchange
with a fairly high share of free float, and demonstrates a good
level of public information disclosure, including quarterly and
annual operating and financial results. Six out of nine members
on its board of directors are independent.
The company's exposure to social risks is moderate and in line with the
overall industry. Data security and data privacy issues are prominent
in the sector. Telecommunications providers exchange large amounts
of data, and a potential breach of data security and data privacy
could cause legal, regulatory or reputation issues. In addition,
a breach could result in increased operational costs to mitigate cyberattacks
and reduce exposure to loss of private data.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the company will
sustain its robust operating and financial performance as well as its
leading market position. The outlook also assumes that MTS'
adjusted debt/EBITDA will remain at 2.5x or below on a sustainable
basis and the company will pursue its prudent development strategy and
balanced financial policy, appropriately sizing shareholder distributions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's does not anticipate a positive pressure on the rating to develop
over the next 12-24 months. However, in a longer term,
an upward pressure on the rating could build up if the company were to
(1) improve its credit profile such that its Moody's-adjusted gross
debt/EBITDA falls below 2.0x and interest coverage increases above
3.5x, both on a sustainable basis, (2) sustain its
market position, revenue growth and high profitability, (3)
maintain strong liquidity, and (4) continue to pursue its balanced
financial policy, along with consistent track record of prudent
financial management by its main shareholder, Sistema. The
positioning of Russia's sovereign ratings (currently at Baa3 stable),
and financial health of Sistema would also be considered as part of any
positive rating move.
Moody's could downgrade MTS' rating if its debt/EBITDA were to trend
towards or above 3.0x and interest coverage decline below 2.2x
on a sustained basis. Downward pressure could also be exerted on
the ratings if MTS' operating profile, profitability,
market position or liquidity were to deteriorate materially. A
downgrade of Russia's sovereign rating or a deterioration in Sistema's
credit quality would also exert negative pressure on the rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Telecommunications
Service Providers published in January 2017 and available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
MTS is the largest integrated telecommunications operator in Russia with
77 million mobile subscribers in the country as of 30 June 2020.
Following the disposal of its Ukrainian business in December 2019,
MTS' operations outside Russia include Armenia and Belarus. In
the 12 months ended 30 June 2020, MTS generated revenue of RUB473
billion (around $7.1 billion) and adjusted EBITDA of RUB232
billion (around $3.5 billion). As of June 2020,
Sistema indirectly held a 56.11% nominal stake in MTS,
while the remaining 43.89% was in free float. Sistema's
effective ownership of MTS is 50.036%.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are unsolicited.
a.With Rated Entity or Related Third Party Participation:
YES
b.With Access to Internal Documents: NO
c.With Access to Management: NO
For additional information, please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
David G. Staples
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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