ACRA assigns BB-(RU) to LLC MediaSeti, outlook Stable

The credit rating of LLC MediaSeti was determined by ACRA following an analysis of the consolidated financial and operating data of its parent group, Trivon AG (hereinafter, the Company, or the Group), in view of the cross-default provisions in the loan documentation applicable to the Group’s obligations. The rating is based on the Company’s high leverage, very low liquidity, lower than average coverage of debt payments, and weak cash flow. The medium business profile and geographic diversification, as well as moderately high profitability are positive factors for the standalone creditworthiness assessment (SCA).

Switzerland-based Trivon AG provides telecommunication services in the Russian market under the brand of Virgin Group. The core business of the Group is broadband internet services. The Company also provides landline telephone communication, television, mobile communication, and VPN services. The Company is implementing a strategy focused on developing digital services. The Group’s shareholders include SAM Capital United Investments Ltd. (10.5%), the European Bank for Reconstruction and Development (15.5%), Richard Branson (13.4%), and International Finance Corporation (12.8%). Other shareholders (with stakes of less than 10%) and the Company’s management control around 48% of equity capital.

Key rating assessment factors

Very low liquidity and weak cash flow. Despite the fact that the Company has reached an agreement with its main lender on extending the principal repayment terms, in the coming years the short-term liquidity ratio will remain very low due to planned debt repayments, and also, according to ACRA’s forecasts, due to the Company’s negative free cash flow (FCF). The FCF margin ranged from -2% to -12% in the previous full three years. To support its FCF, the Company can partially reduce its capital expenditures. According to ACRA’s estimates, the Company’s FCF may remain negative in the next two years due to making planned debt service payments using internal sources. ACRA expects the Company to achieve a positive FCF in two years’ time if its business expansion strategy is successful.

High leverage. As of March 25, 2020, the Group’s total bank debt was around RUB 600 mln, having decreased from RUB 930 mln over the preceding twelve months. The Company had to use part of its working capital to make debt obligation payments over the past year. In ACRA’s opinion, this may result in the Company requiring additional investments in its working capital in the medium term. In addition, the Company’s strategy involves making significant investments, which will also contribute to higher debts. The Group’s debt is made up of ruble-denominated fixed-rate loans from JSC Raiffeisenbank. The Company’s leverage is assessed as high: ACRA expects the total debt to FFO before interest payments ratio to equal 4.2x in the period from July 1, 2019 to June 30, 2020, while the operating lease-adjusted debt to FFO before fixed charges ratio is expected at 5.7x in the same period. ACRA assumes these ratios will gradually decrease by June 30, 2023 (to 1.9x and 3.5x, respectively) if the Company’s strategic plans are successful. ACRA assesses the coverage of interest payments and fixed charges as low: the FFO before interest payments to interest payments ratio equals 1.9x and the FFO before fixed charges to fixed charges ratio equals 1.3x (estimate for the period from July 1, 2019 to June 30, 2020). ACRA expects further growth of these indicators over the forecast period in connection with the indicated leverage dynamics.

Moderately high profitability and a highly concentrated market position. The Company is a competitive player in a fragmented market. In terms of national market share, the Company is behind the leaders (PJSC Rostelecom, JSC ER-Telecom Holding, PJSC MTS, and PJSC Vimpelcom). The Company’s subscriber base has around 212,000 subscribers, with 166,000 B2C clients and 44,000 B2B clients. The Company’s market position in individual cities is assessed as fairly strong. The subscriber base of the Company in the B2C segment has been decreasing in the last two years; yet at the same time, the quantity of services per subscriber has increased, driven by higher penetration of TV and internet+TV services. This has resulted in a higher average monthly revenue per user (ARPU) compared to the market average. The Company has taken specific actions to maintain its operating profitability, which have resulted in a higher FFO before interest payments in the short term. In the medium term, however, ACRA believes the FFO margin before fixed charges will remain at the current level: 33–34%.

Medium business profile and geographic diversification. A considerable portion of the Company’s telecommunications equipment is technologically advanced and is owned by the Company. Equipment accommodation sites as well as cable and fiber-optic communication lines make up the bulk of the leased assets; around 25–30% of the Company’s fiber-optic lines are leased. As noted above, broadband internet services are the core business of the Group, while its key regions include the Moscow Region (B2C) and million-plus cities in Russia (B2B). The penetration of the Company’s broadband services in the regions it operates in is low due to its small B2C subscriber base.

Corporate governance is assessed as low due to the lack of independent members in the board of directors. The Company’s strategy is focused on growing the market share and revenues from digital services. Developing a mobile virtual network operator (MVNO) using the infrastructure of T2 RTK Holding LLC is among the strategic priorities of the Company. However, the MVNO’s subscriber base is currently small. The Company does not rule out taking part in M&A deals in the medium term. In ACRA’s opinion, the failure to grow the subscriber base in the last 12 months as planned negatively affects the strategy assessment. Although the Group’s structure is sufficiently complex, intragroup settlements are economically justified. The Company prepares its consolidated financial statements under IFRS, which are audited by BDO. At the same time, the Group does not publish its reporting or operating numbers.

Key assumptions

  • Business expansion driven by MVNO services, increasing the level of conversion and the number of services per client, and also through inorganic growth that provides for 6% average annual growth of the total subscriber base in the forecast period;
  • Annual ARPU growth in the B2C and B2B segments at the rate of inflation in 2020–2023;
  • Limited access to external liquidity sources;
  • Positive FCF by 2022.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Adjusted debt to FFO before fixed charges ratio falling below 3.5x coupled with growth of debt payment coverage above 2.5x;
  • Refinancing of existing debt for a longer period and under a much more comfortable repayment schedule;
  • Consistently positive FCF indicators coupled with growth of the short-term liquidity ratio above 0.8x and maintenance of this level throughout 2020–2022.
  • A negative rating action may be prompted by:
  • FFO before fixed charges to fixed charges ratio falling below 1x;
  • Adjusted debt to FFO before fixed charges ratio exceeding 5x;
  • FFO margin before fixed charges and taxes falling below 30%.

Rating components

SCA: bb-.

Adjustments: none.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

A credit rating has been assigned to LLC MediaSeti for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on data provided by LLC MediaSeti, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and LLC MediaSeti participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Trivon AG and LLC MediaSeti in their financial statements have been discovered.

ACRA provided no additional services to LLC MediaSeti. No conflicts of interest were discovered in the course of credit rating assignment.

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