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Rating Action:

Moody's places MegaFon's ratings under review for downgrade

19 Jul 2018

London, 19 July 2018 -- Moody's Investors Service has today placed under review for downgrade the Ba1 corporate family rating and the Ba1-PD probability of default rating of MegaFon PJSC (MegaFon), Russia's second-largest mobile operator.

The rating action follows the announcement on 16 July 2018 by MegaFon Investments (Cyprus) Limited (MICL), a wholly owned subsidiary of MegaFon, of a tender offer to purchase for cash up to 128,950,036 of ordinary shares listed on the Moscow Exchange and the global depositary receipts (GDRs) listed on the London Stock Exchange (LSE), representing in total 20.8% of the company's issued and outstanding shares. The buy-back is part of the approved programme to terminate the listing of GDRs on the LSE and materially reduce the free float on the Moscow Exchange. If successful, it will result in the company becoming fully private. The tender offer is expected to expire on 22 August 2018 with the announcement on the results on or about 23 August 2018.

According to MegaFon, with the buy-back the company provides exit opportunities for minority shareholders before the delisting, which is driven by its new business strategy announced in May 2017. In particular, Megafon's new strategy envisages transformation into the leading operator in the domestic digital market from a traditional telecom operator and, according to the company, may result in a weaker operating and financial risk profile of MegaFon involving (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.

RATINGS RATIONALE

The rating action is primarily driven by the anticipated increase in leverage as a result of the transaction, which is likely to lead to a credit profile no longer commensurate with the current ratings' positioning at Ba1 with a positive outlook. The delisting will also elevate risks related to the potential changes in MegaFon's corporate governance (although no such intention was communicated by the company) and the associated shift towards a more aggressive financial policy under its new business strategy.

With the proposed purchase price of $9.75 for each ordinary share and for each GDR, the buy-back will amount up to $1.2 billion (around RUB75-78 billion depending on the RUB/USD exchange rate) if all the shares are tendered, and will be funded with available cash reserves and external debt.

Although at this stage the exact amount and the financing structure of the buy-back remains uncertain, as a result of this transaction the company expects its reported net debt/OIBDA to increase by around 0.6x-0.7x up to 2.5x-2.6x based on 1Q 2018 financial results. On this basis, according to Moody's estimations, MegaFon's adjusted debt/EBITDA could rise up to 3.0x as of year-end 2018 from 2.1x as of end March 2018 if the transaction is fully financed with new debt. In such a scenario, the weakening in the company's leverage profile may become fairly material relative to its historical performance and the current rating positioning at Ba1 with positive outlook.

As part of the review, Moody's will consider the impact of the proposed buy-back on MegaFon's business and financial risk profile. We will also review the impact of other potential corporate actions and initiatives mentioned above on Megafon's longer term credit and operational profile to evaluate whether the anticipated deviations can still be accommodated within the Ba1 rating.

Moody's will aim to close the review within the next 3 months.

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.
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