London, 24 September 2020 -- Moody's Investors Service ("Moody's") has today
changed VEON Ltd.'s (VEON) outlook to stable from positive.
At the same time, Moody's has affirmed the
Ba2 corporate family
rating (CFR) and the
Ba2-PD probability of default rating (PDR).
Concurrently, Moody's has affirmed the
Ba2 long term issuer rating
of VimpelCom PJSC, VEON's operating subsidiary, the
Ba2 senior
unsecured ratings of the outstanding bond instruments issued or transferred
by VEON Holdings B.V., VEON's 100% indirectly
owned subsidiary, and the
Ba2 senior unsecured rating of VIP Finance
Ireland Limited. The outlook on all affected issuers has been changed
to stable from positive.
RATINGS RATIONALE
Today's rating action reflects Moody's expectation that VEON's
credit metrics will weaken moderately in 2020-21 and remain outside
of the range commensurate with the higher rating, which means a
ratings' upgrade is unlikely over the next 12-18 months.
The rating action also takes into account the company's operating weakness
in Russia as well as in its other emerging market locations exacerbated
by the current global economic slump.
VEON's revenue decreased by 7% in US dollar terms between
2017 and 2019 because of weak operating performance and local currency
depreciation in some of its core markets. We anticipate that it
is likely to decline further by around 10% in 2020 due to a temporary
curtailment of roaming services, partial closure of retail outlets
and reduced demand from most pandemic-affected customers.
In particular, the company's operating performance was weak
in its core Russian market, with the number of mobile subscribers
decreasing by 12% over the last two years, and in its second-largest
Pakistani market because of the depreciation of rupee. Although
the company is currently focusing on improving operational execution,
immediate external headwinds and existing operating challenges will result
in a subdued financial performance over the next 12 months.
On the positive side, the company may return to slow growth of 1.5%-2.0%
a year in 2021-22 on the back of the economic recovery and some
improvements in its Russian business, should those materialise.
VEON should also be able to sustain its good profitability, with
its Moody's-adjusted EBITDA margin remaining at 43%-45%
in 2020-22 thanks to its cost optimisation initiatives.
The company is increasing its capital spending in Russia to overcome underinvestment
in previous years and to stop erosion of its market position in the country.
This, together with investment needs in other regions, including
a potential increase in license payments in Pakistan, and a drop
in operating cash flow in 2020 will weigh on VEON's cash generation
over the next 12-18 months and curtail its capacity for deleveraging.
Moody's expects VEON's leverage, measured as Moody's-adjusted
debt/EBITDA, to increase to 2.8x in 2020 from 2.4x-2.5x
in 2018-19 due to the fall in EBITDA, before gradually improving
to 2.7x in 2021 and 2.6x in 2022, thanks to some rebound
in profits and a modest reduction in debt. Its interest coverage,
measured as adjusted (EBITDA -- capital spending) / interest expense,
may decrease to 1.5x in 2020, from 2.1 in 2019 and
1.7x in 2017-18, and then gradually improve to 1.8x
in 2021-22.
VEON generates around half of its revenue in Russia's (Baa3 stable)
highly competitive and saturated telecommunications market where it ranks
third, after Mobile TeleSystems PJSC (Baa3 stable) and MegaFon PJSC
(Ba1 stable). The company's presence in Pakistan (B3 stable),
Ukraine (B3 stable), Algeria and other developing regions provides
for geographic diversification and exposure to higher growth markets,
but it also amplifies business and operating environment risks and becomes
a weakness during turbulent times.
The company's rating takes into account VEON's (1) integrated
business model, with own infrastructure; (2) streamlining of
its operating assets and corporate legal structure through the restructuring
of its Egypt-domiciled subsidiary, Global Telecom Holding
S.A.E. (GTH); (3) development of digital products
and services; (4) prudent financial and dividend policies; and
(5) adequate liquidity, underpinned by unutilised credit facilities.
The rating also factors in (1) the company's structural currency
mismatch between its 50% US dollar-denominated debt and
half of its revenue generated in local currencies of the countries in
which it operates (excluding Russia); (2) the regulatory headwinds
and intense competition in the company's key geographies; and (3)
elevated country risks due to VEON's focus on emerging markets.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
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.
Corporate governance considerations incorporate VEON's concentrated ownership
structure, with 47.9% of the company's share
owned by LetterOne. In addition, LetterOne is the holder
of depositary receipts issued by the Stichting, a foundation incorporated
under the laws of the Netherlands, which owns a 8.3%
stake in VEON. Therefore, LetterOne is entitled to the economic
benefits of such depositary receipts. However, the Stichting
has the power to vote and dispose its stake in VEON at its sole discretion.
VEON's corporate governance risks are mitigated by the fact that it is
a listed company with a fairly high free float (43.8%).
The company also demonstrates a good level of public information disclosure.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects the company's currently comfortable position
in the rating category and Moody's expectation that VEON will maintain
its leverage below 3.0x and sustain at least adequate liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade VEON's rating if the company were to (1) improve
its credit profile such that its Moody's-adjusted gross debt/EBITDA
falls below 2.5x and retained cash flow (RCF)/debt increases above
25%, both on a sustainable basis, (2) sustain its market
position in key regions and improve its operating performance in Russia,
and (3) maintain healthy liquidity.
Moody's could downgrade VEON's rating if its debt/EBITDA were to
rise above 3.5x and RCF/debt trend towards the mid-teens
on a sustained basis. Downward pressure could also be exerted on
the rating if VEON's operating profile, market position or
liquidity were to deteriorate materially.
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.
LIST OF AFFECTED RATINGS:
Affirmations:
..Issuer: VEON Ltd.
.... LT Corporate Family Rating, Affirmed
Ba2
.... Probability of Default Rating,
Affirmed
Ba2-PD
..Issuer: VEON Holdings B.V.
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed
Ba2
....Senior Unsecured Regular Bond/Debenture,
Affirmed
Ba2
..Issuer: VimpelCom PJSC
.... LT Issuer Rating, Affirmed
Ba2
..Issuer: VIP Finance Ireland Limited
....Backed Senior Unsecured Regular Bond/Debenture
, Affirmed
Ba2
Outlook Actions:
..Issuer: VEON Holdings B.V.
....Outlook, Changed To Stable From
Positive
..Issuer: VEON Ltd.
....Outlook, Changed To Stable From
Positive
..Issuer: VimpelCom PJSC
....Outlook, Changed To Stable From
Positive
..Issuer: VIP Finance Ireland Limited
....Outlook, Changed To Stable From
Positive
Headquartered in Amsterdam, VEON Ltd. is an international
telecoms company operating in 10 emerging markets, with Russian
operations contributing around half of total revenue. In the 12
months ended June 2020, the company generated revenue of $8.5
billion and Moody's-adjusted EBITDA of $3.8 billion.
The company is 47.9% owned by LetterOne, 8.3%
by Stichting Administratiekantoor Mobile Telecommunications Investor (Stichting)
and 43.8% are in a free float.
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:
NO
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.
Items color coded in purple in this Press Release relate to unsolicited
ratings for a rated entity which is non-participating.
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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