ACRA affirms AA(RU) to PJSC Rostelecom, outlook Stable, and AA(RU) to bond issues

The credit rating of PJSC Rostelecom (hereinafter, the Company) is based on the Company’s strong business profile, very large scope and leading market positions, very high liquidity level, and moderate state support. At the same time, the Company’s rating assessment is limited by medium leverage, the fact that some of its infrastructure sections are from different generations of telecommunications technology, and its substantial presence in segments with declining revenues.

In 2020, a transaction was closed to consolidate T2 RTK Holding LLC (hereinafter, Tele2, A(RU), outlook Positive), a significant part of which was financed by an exchange of shares and an additional issue of the Company’s ordinary shares. Raising funds on the debt market to finance the remaining part of the transaction has not led to a drastic change in the Company’s creditworthiness. ACRA does not expect this transaction to have a significant impact on the business of the combined companies within the forecast period (over the next three years), but assumes an increase in operating efficiency in the medium term1.

The Company is the largest provider of digital services and solutions in all segments in Russia, a leading fixed-line services provider in the majority of regions, and the largest broadband operator. The Russian Federation is the Company’s biggest shareholder. The state directly owns 38.20% of ordinary shares through the Federal Agency for State Property Management (Rosimushchestvo), 8.44% belongs to Bank VTB, another 3.36% is owned by THE STATE DEVELOPMENT CORPORATION VEB.RF (“VEB”) (AAA(RU), outlook Stable), and 28.64% of ordinary shares are in free float.


1 To assess financial factors, ACRA calculated and predicted the Company’s performance taking into account the consolidation of Tele2 and its subsidiaries. Hereinafter, all indicators are presented with this consolidation in mind.

Key rating assessment factors

The Company’s leverage is medium. Over the past year, leverage has increased due to the Company raising funds to finance the purchase of Tele2 shares. However, this increase has not led to a significant change in the assessment of this factor, which remains at an average level. As such, total debt to FFO (funds from operations) before net interest payments stands at 2.45x based on results for 2019, while debt adjusted for operating lease to FFO before fixed payments stands at 2.80x. FFO before fixed charges to fixed charges stands at 3.27x. ACRA expects the Company’s leverage to remain at the level of 2019 in 2020-2022.

The strong business profile is based on the high level of diversification in the Company’s activities. The largest shares in the structure of consolidated revenue in 2019 are accounted for by mobile communications at 32%, broadband internet access at 17%, and fixed telephony at 12% (although demand for this type of service has declined in recent years). In recent years, there has been rapid growth in the digital services segment, with the share in the Company’s revenue structure increasing from 2% in 2017 to 10% in 2019. The Company almost completely owns its infrastructure, which increases the stability of its operations. However, in some areas it belongs to different technological generations, which limits the Company’s rating. ACRA assesses the impact of the pandemic on the Company’s business as neutral. The decline in the small and medium-sized business segment is expected to be offset by the growth of the large corporate clients segment.

The Company’s very large size and leading market positions are largely determined by its high share both in the Russian telecommunications market and in its main segments. The Company has a broad customer base: 44.6 million subscribers in the mobile segment, 15.3 million in the fixed telephony segment, 13.2 million in the broadband segment, and 10.5 million in the subscription TV segment (data for the end of Q1 2020). FFO before fixed payments and taxes amounted to RUB 184 bln for 2019.

The Company’s very strong liquidity position is based on significant volumes of undrawn credit lines, which provide the Company with comfortable repayments in 2020-2022. At the same time, committed credit facilities account for 23% of the undrawn credit lines. ACRA expects that in 2020, the Company’s free cash flow (FCF) will be negative after dividend payments, but the return on FCF will not fall below -3%. ACRA assumes an improvement in FCF to positive figures 2021-2022.

The Company’s high profitability is based on a high blended ARPU (average revenue per user) value, which stood at RUB 551 in Q1 2020 (1.5% higher than in Q1 2019). Return on FFO before fixed charges was 37% in 2019. Although this figure is high, it is somewhat lower compared to peers in the Russian telecommunications industry.

Key assumptions

  • No substantial impact on the Company’s business as a result of the pandemic;
  • Reducing revenues from fixed-line telephony by 9-10% annually with an increase in the digital business segment;
  • Maintaining  the investment program at RUB 70 bln annually;
  • Maintaining a substantial amount of undrawn credit lines including committed facilities.

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:

  • Decrease in the ratio of debt adjusted for operating lease to FFO before fixed charges below 2.0x; increase in the ratio of FFO before fixed charges to fixed charges above 5.0x.

A negative rating action may be prompted by:

  • Increase in the ratio of debt adjusted for operating lease to FFO before fixed charges exceeding 3.5x;
  • Reduction in annual average revenues from fixed-line and wholesale services by more than 9-10% in 2020-2022;
  • Revenue growth from new services below planned levels;
  • Considerably less access to external liquidity sources.

Rating components

SCA: aa-.

Adjustments: none.

Support: +1 notch to SCA.

Issue ratings

Exchange-traded interest-bearing certified unregistered bond issued by PJSC Rostelecom (RU000A0ZYG52), maturity date: November 9, 2027, issue volume: RUB 10 bln — AA(RU).

Exchange-traded interest-bearing certified unregistered bond issued by PJSC Rostelecom (RU000A0ZYYE3), maturity date: March 3, 2028, issue volume: RUB 10 bln — AA(RU).

Exchange-traded interest-bearing certified unregistered bond issued by PJSC Rostelecom (RU000A100881), maturity date: March 21, 2029, issue volume: RUB 15 bln — AA(RU).

Exchange-traded interest-bearing certified unregistered bond issued by PJSC Rostelecom (RU000A101541), maturity date: November 27, 2025, issue volume: RUB 10 bln — AA(RU).

Uncertified non-convertible exchange-traded interest-bearing bond subject to centralized title registration issued by PJSC Rostelecom (RU000A101FC7), maturity date: February 14, 2023, issue volume: RUB 15 bln — AA(RU).

Uncertified non-convertible exchange-traded interest-bearing bond subject to centralized title registration issued by PJSC Rostelecom (RU000A101FG8), maturity date: February 10, 2027, issue volume: RUB 15 bln — AA(RU).

Uncertified non-convertible exchange-traded interest-bearing bond subject to centralized title registration issued by PJSC Rostelecom (RU000A101LY9), maturity date: April 21, 2023, issue volume: RUB 10 bln — AA(RU).

Credit rating rationale. The above issues (RU000A0ZYG52, RU000A0ZYYE3, RU000A100881, RU000A101541, RU000A101FC7, RU000A101FG8, RU000A101LY9) represent senior unsecured debt of PJSC Rostelecom. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the credit ratings of the bonds are equivalent to that of PJSC Rostelecom.

Regulatory disclosure

The credit ratings were assigned to PJSC Rostelecom and the bonds (RU000A0ZYG52, RU000A0ZYYE3, RU000A100881, RU000A101541, RU000A101FC7, RU000A101FG8, RU000A101LY9) issued by PJSC Rostelecom 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, the Methodology for Analyzing Relationships between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above bond issues.

The credit ratings of PJSC Rostelecom and the bonds (RU000A0ZYG52, RU000A0ZYYE3, RU000A100881, RU000A101541, RU000A101FC7, RU000A101FG8, RU000A101LY9) issued by PJSC Rostelecom were first published by ACRA on July 14, 2017, November 21, 2017, March 16, 2018, April 3, 2019, December 5, 2019, February 18, 2020, February 19, 2020, and April 24, 2020, respectively. The credit rating of PJSC Rostelecom and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the publication date of this press release.

The assigned credit ratings are based on the data provided by PJSC Rostelecom information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and PJSC Rostelecom participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by PJSC Rostelecom in its financial statements have been discovered.

ACRA provided additional services to PJSC Rostelecom. No conflicts of interest were discovered in the course of credit rating assignment.

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