ACRA affirms AA(RU) to PJSC «MegaFon», outlook Stable, and AA(RU) to bond issues

The credit rating of PJSC «MegaFon» (hereinafter, the Company) is based on the Company’s medium leverage, very large scope and very high profitability, strong business profile and strong liquidity position, as well as a very high level of corporate governance and moderate cash flow.

PJSC «MegaFon» is one of the largest telecommunications companies in Russia. It ranks second in subscribers and revenue among mobile communications providers in the country. The key shareholders of MegaFon are companies of the USM Group.

Key rating assessment factors

Medium leverage. In 2019, the size of the Company’s financial debt, represented mainly by loans and bonds, increased by 14.5% and amounted to RUB 375 bln at the end of the year. Lease-adjusted total debt to FFO before fixed payments increased slightly to 3.4x in 2019. FFO before fixed payments to fixed payments decreased from the previous year’s level to 2.6x. Leverage remains average, although ACRA still expects a gradual decrease due to consistently positive free cash flow (FCF) in the absence of plans for dividend payments. According to ACRA, lease-adjusted total debt to FFO before fixed payments could equal 2.6–2.7x by 2022.

Strong liquidity position with strong FCF. In 2017−2019, the Company’s FCF was positive. Return on FCF during this period averaged between 2% and 7%. The Company’s choice not to pay dividends provides significant support for its FCF. However, capital expenditures remain high, equaling 19.3% of revenue at the end of 2019. ACRA expects an improvement in FCF in 2020−2022 due to a planned reduction in capital expenditures, as well as an improvement in operating cash flow, which could become a significant source of liquidity for debt repayment during this period. In addition, the Company has a significant amount of credit available to draw in the form of signed credit lines. Therefore, ACRA assesses the Company’s liquidity as strong.

Very large scope and very high profitability. The Company ranks second in subscribers and revenue among Russian mobile communications providers. In 2019, the Company’s consolidated revenue amounted to RUB 349 bln with FFO before fixed payments and taxes equaling RUB 152 bln. The Company’s services are used by 76.9 million people, while the subscriber base in Russia amounted to 75.2 million people in 2019. According to ACRA, the average revenue per user (ARPU) is lower than that demonstrated by peers, although the Company remains a leader among nationwide communications providers in terms of profitability. Return on FFO before fixed payments and taxes at the end of 2019 stood at 44%. ACRA expects a comparable level of profitability in 2020−2022.

Strong business profile and broad geographical coverage. The Company benefits from its state-of-the-art telecommunications infrastructure. The Company operates a 210,900 km trunk network and 181,400 base stations. As of end-2019, the Company’s 4G network covered 82% of the country’s population. Currently, the Company is involved in 5G standard development and testing. The Company’s operations are focused on mobile communications services, which made up 80% of revenue in 2019 (mobile data services accounted for 31%).

Key assumptions

  • Changes in ARPU below 1.5%;
  • Consistent decline in leverage;
  • Subscriber base remaining stable.

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 lease-adjusted total debt to FFO before fixed payments below 2.0x or increase in FFO before fixed payments to fixed payments above 5.0x.

A negative rating action may be prompted by:

  • Increase in lease-adjusted total debt to FFO before fixed payments above 3.5х with a decrease in FFO before fixed payments to fixed payments below 2.5x;
  • Decrease in FFO before fixed payments and taxes below 40%;
  • Significantly less access to external liquidity sources with a decrease in FFO before fixed payments to fixed payments below 2.5x;
  • Increase in capital expenditures above planned levels with increased leverage and deteriorating debt coverage;
  • Deteriorating corporate governance practices (including information transparency).

Rating components

SCA: aa.

Adjustments: none.

Issue ratings

PJSC «MegaFon» (RU000A0ZYC98), maturity date: October 3, 2022, issue volume: RUB 15 bln — AA(RU).

PJSC «MegaFon» (RU000A0ZYTM6), maturity date: February 15, 2021, issue volume: RUB 20 bln — AA(RU).

PJSC «MegaFon» (RU000A1002P4), maturity date: January 31, 2022, issue volume: RUB 20 bln — AA(RU).

PJSC «MegaFon» (RU000A1006G4), maturity date: March 11, 2024, issue volume: RUB 5 bln — AA(RU).

PJSC «MegaFon» (RU000A1006H2), maturity date: March 11, 2024, issue volume: RUB 5 bln — AA(RU).

PJSC «MegaFon» (RU000A1009A1), maturity date: April 6, 2026, issue volume: RUB 10 bln — AA(RU).

Credit rating rationale. The issues represent senior unsecured debt of MegaFon. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the credit rating of the issues is equivalent to that of MegaFon, i.e. AA(RU).

Regulatory disclosure

The credit ratings were assigned to PJSC «MegaFon» and bonds (RU000A0ZYC98, RU000A0ZYTM6, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» 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. To assign a credit rating to the above bond issues the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit ratings assigned to PJSC «MegaFon» and bonds (RU000A0ZYC98, RU000A0ZYTM6, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» were first published by ACRA on September 21, 2017, October 9, 2017, February 19, 2018, February 4, 2019, March 18, 2019, March 18, 2019, and April 15, 2019, respectively. The credit rating of PJSC «MegaFon» and its outlook and the credit ratings assigned to bonds (RU000A0ZYC98, RU000A0ZYTM6, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by PJSC «MegaFon», information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements and management reporting of PJSC «MegaFon». The credit ratings are solicited, and PJSC «MegaFon» participated in their assignment.

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

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

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