ACRA assigns AA-(RU) to VEON Holdings B.V., outlook Stable

The credit rating assigned to VEON Holdings B.V. (hereinafter, the Company, VEON, or the Group) was determined by ACRA following analysis of the consolidated financial and operating data of its parent group VEON Ltd. The credit rating of the Company is based on its strong business profile underpinned by its market position in Russia and the growing share in other markets where the Company operates and good geographical diversification. The credit rating is further supported by the scale of the Company characterized by the size of its revenues, very high profitability and very strong liquidity position. The rating is constrained by the Company’s medium leverage and coverage, as well as the average assessment of its cash flow.

VEON provides telecommunications and digital services in emerging markets. It is headquartered in Amsterdam. As of the end of Q3 2020, the subscriber base of VEON amounted to 207 mln mobile users and 4.4 mln fixed line users. The Company’s most important market (accounting for more than half of its revenues) is Russia, where VEON ranks third in terms of size and number of users among mobile operators. Other major markets in terms of business share are Pakistan (15% of total revenues) and Ukraine (10% of total revenues). The key shareholder of VEON is investment firm LetterOne (with a 47.9% share in the Company’s authorized capital), which was founded by Mikhail Fridman, German Khan, and Alexey Kuzmichev. A significant share of the Company’s stocks (43.8%) is in free float, while the remaining 8.3% is owned by Dutch fund Stichting.

Key rating assessment factors

Strong business profile and very strong geographical diversification. The key area of VEON’s activities is the provision of mobile communication services (approximately 65% share in consolidated revenues) in Eastern Europe, Central and South Asia, and North Africa. ACRA notes the sufficiently high level of 4G network coverage in all the key jurisdictions where the Company is present (except Pakistan). Besides the mobile segment, in some regions the Company provides broadband internet access, which accounts for 7.6% of revenues. To provide communication services, the Company operates modern telecommunications infrastructure, a significant part of which it owns.

Very large size and very high profitability. ACRA expects the Company’s revenues to total USD 8.1 bln in 2020, and FFO before fixed charges and taxes at USD 4.0 bln. The total subscriber base as of the end of Q3 2020 stood at 207.4 mln, and revenue per user (ARPU) was in the range from USD 1.4 in Pakistan and Bangladesh to USD 4.8 in Russia (RUB 350). At the same time, ACRA notes a continuing downward trend in the Company’s subscriber base in Russia in recent years, with a peak value of -9% (y-o-y, i.e. Sept 2020 vs. Sept 2019). This trend and its exacerbation amid the coronavirus crisis may be related to factors that are common for all Russian telecommunications companies — the return of non-Russian workers to their home countries and decline in the number of SIM cards per person — as well as factors that are specific to PJSC VimpelCom — underinvestment in infrastructure in recent years, which has impacted how consumers perceive the Company. The Company is characterized by a very high level of profitability. FFO profitability before fixed charges and taxes for the past several years has ranged within 48–51%. In the next three years, ACRA expects this profitability indicator to be around 48%.

Medium leverage and medium coverage. The ratio of total debt adjusted for operating lease to FFO before fixed charges is estimated by ACRA at 2.7x for 2020. The Company’s leverage is under pressure from the currency risk, since a significant share of debt obligations is denominated in US dollars, while the operating cash flows are denominated in rather volatile currencies of developing countries. ACRA notes that the Company has made significant improvements in terms of debt currency mix over the last few years.

The Company’s loan portfolio is diversified in terms of lenders, and in the next two years there are no material maturities. The ratio of FFO before fixed charges to fixed charges is estimated by ACRA at 4.1x for 2020. ACRA does not expect any significant changes in the Company’s leverage and coverage metrics in 2021–2023.

Very strong liquidity and medium cash flow. The Company is characterized by very strong liquidity. There are no maturity peaks in the next two years. VEON has extensive expertise in financial markets (43.8% of the Company’s shares are in free float and the Group is active in the bond market). The volume of open credit lines exceeds USD 1.6 bln. A peak in capital expenditures is falling on 2020 and 2021 (23% of revenues); subsequently, the indicator is likely to stabilize at 21% of revenues. The Company is actively investing in upgrading its communications infrastructure in Moscow, the Moscow Region, and St. Petersburg. VEON is investing heavily in the deployment of 4G networks, especially in regions where 4G penetration remains low. In 2019, the Company adopted a new dividend policy, according to which it plans to pay at least 50% of FCFE (Free Cash Flow to Equity) after deducting license costs but it is unlikely that VEON will pay a dividend over 2020 results. Despite pressure from capital expenditures and dividend payments, ACRA expects that the Company’s FCF will be positive over the next three years (in the range of USD 165-340– mln), which is also regarded by ACRA as a source of liquidity.

Very high level of corporate governance. VEON’s top managers boast vast industry experience. The Company has a board of directors consisting of eleven members, seven of whom are independent. The board of directors has established committees for corporate governance, finance, audit and risk, and compensation. The decision-making processes, financial policy and risk management are well regulated. At the same time, frequent changes in the management bodies of the Group, in ACRA’s opinion, indicate incomplete implementation of strategic objectives. ACRA notes that VEON’s information transparency is high.

Key assumptions

  • Positive FCF margin after dividend payouts;
  • Slower decline in revenues in the next three years compared to 2020;
  • No material currency devaluations in the countries where the Company’s business share is significant;
  • Capital expenditures to decline (both in absolute value and as a percentage of revenue) after 2021.

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:

  • Ratio of total debt adjusted for operating lease to FFO before fixed charges falling below 2.0x amid sustainable business growth in key markets in the coming years due to an increase in the number of subscribers and ARPU;
  • Weighted average FCF margin increasing up to 5%.

A negative rating action may be prompted by:

  • Ratio of total debt adjusted for operating lease to FFO before fixed charges exceeding 3.5x;
  • Ratio of FFO before fixed charges to fixed charges falling below 2.5x;
  • FFO margin before fixed charges and taxes falling below 40%.

Rating components

SCA: aa-.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

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 VEON Holdings B.V. 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 the data provided by VEON Holdings B.V. and VEON Ltd., information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, VEON Holdings B.V. and VEON Ltd. participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by VEON Holdings B.V. and VEON Ltd. in its financial statements have been discovered.

ACRA provided no additional services to VEON Holdings B.V. No conflicts of interest were discovered in the course of credit rating assignment.

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