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Related Issuers
Rating Action:

Moody's confirms MegaFon at Ba1, stable outlook

11 Sep 2018

London, 11 September 2018 -- Moody's Investors Service has today confirmed the Ba1 corporate family rating and the Ba1-PD probability of default rating of MegaFon PJSC (MegaFon), Russia's second-largest mobile operator. The outlook on the ratings is stable.

The action concludes the review for downgrade initiated by the agency following MegaFon's announcement on 16 July 2018 that it will buy back up to 20.80% of its ordinary shares via its fully-owned subsidiary MegaFon Investments (Cyprus) Limited (MICL) for up to $1.2 billion, and fund the transaction predominantly with new debt. The company also announced that it will delist from the London Stock Exchange (LSE).

On 23 August MegaFon advised that as a result of the tender offer it will buy back 18.6% of the company's issued and outstanding shares for a total consideration of approximately $1.12 billion (around RUB76 billion).

RATINGS RATIONALE

RATIONALE FOR THE STABILISATION OF OUTLOOK

According to MegaFon, the share buyback and subsequent delisting of the company from LSE are in line with the its previously announced new business strategy which will involve, inter alia: 1) broader partnerships with state-owned corporations, (2) transactions with higher risks, (3) investments in infrastructure with lower returns, (4) higher leverage, and (5) lower dividends.

The predominantly debt-funded buyback alongside higher regulator-imposed investment needs will have a moderately negative effect on MegaFon's financial metrics, driving a weakening in the coverage metrics and an increase in leverage measured by adjusted debt/EBITDA to 2.8x, pro forma for the transaction, from 2.1x as of end-June, 2018.

The company has also publicly announced an elevated appetite for risk and tolerance for leverage. Combined with lower visibility around business strategy this increases the uncertainty for MegaFon's credit profile.

At the same time, the agency positively notes the company's strong competitive positioning on Russia's telecommunications market, its track record of robust operating and financial performance, as well as healthy liquidity and adequate foreign exchange exposure management that add resilience to its credit profile. The company has confirmed that it remains in compliance with all applicable covenants.

Moody's cautions that the ratings do not incorporate any event or integration risks related to large-scale acquisitions which could be part of the strategy implementation; such activities would be assessed by the agency on a case-by-case basis for their impact on the ratings.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on MegaFon's ratings reflects Moody's expectation that (1) the company will not allow for the deterioration of its financial metrics beyond the currently anticipated levels; and (2) will maintain a healthy liquidity profile, addressing its refinancing needs in a timely fashion.

WHAT COULD CHANGE THE RATING UP/DOWN

We do not anticipate positive pressure on the ratings to develop over the next 12-18 months. In the longer term, positive pressure on the ratings could be driven by a combination of (1) a material improvement in financial metrics, 2) a clearer view on the financial and operating strategy, along with transparent and sustainable financial policies, and (3) a sovereign rating upgrade.

Negative pressure on MegaFon's rating could occur if (1) the company's financial and liquidity profile deteriorated beyond the currently expected levels, with adjusted gross debt/EBITDA rising above 3.5x on a sustained basis, and/or (2) there were material negative developments in the company's operating and regulatory environment. A downgrade of Russia's sovereign bond rating would trigger a downgrade of MegaFon.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

MegaFon is Russia's second-largest mobile operator, with 75.4 million mobile subscribers in Russia and more than 77 million overall as of 31 December 2017. In 2017, it generated revenue of RUB373.3 billion (around $6.4 billion), of which RUB321.8 billion was in the telecoms segment, and Moody's-adjusted EBITDA of RUB155.8 billion (around $2.7 billion). The company's operations outside Russia (Tajikistan, Abkhazia and South Ossetia) contributed around 1.4% to consolidated revenue.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Julia Pribytkova
Vice President - Senior 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

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​

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