OREANDA-NEWS. On 23 December 2008 was announced, that Fitch Ratings affirmed OJSC Far East Telecom’s (‘Far East Telecom’) Long-term Issuer’s Default Rating (IDR) at ‘B+’ with a Stable Outlook and Short-term IDR at ‘B’.

Far East Telecom continues demonstrating strong financial performance in 2007 and 2008. The incumbent’s EBITDA margin has improved from 26.7% in 2006 to 31.6% in 2007. EBITDA on a LTM basis to Q308 is estimated by Fitch at 32.5% underpinned by broadband revenue growth, successful turn-around of the incumbent’s 51%-controlled subsidiary ‘Sakhatelecom’ and cost control measures undertaken by the incumbent. The agency thinks that Far East Telecom is likely to sustain healthy EBITDA margins in the medium term perspective, though increasing cost inflationary pressure is likely to be a constraining factor for significant EBITDA growth.

In 2007 Far East Telecom reached a Free-Cash-Flow (FCF) positive position and the agency expects the incumbent to remain FCF-positive in 2008-2009. The agency thinks that the issuer’s capex program in 2008-2009 will be partially shaped by debt availability in the financial markets and macroeconomic situation in Russia at that time. However, the issuer’s capital expenditure (capex) is scalable and can be significantly reduced if not enough debt is available. Fitch expects capex to be directed to broadband and zonal network expansion, with minimal network digitalisation expenditure.

Far East Telecom’s leverage (measured as Net Debt to EBITDA) is low at 1.4x at end-2007, a significant improvement from 2.2x at end 2006. According to 2007 results, the issuer belongs to the least leveraged peers from Svyazinvest group, such as OAO North-West Telecom and OAO Volgatelecom. Fitch expects Far East Telecom to remain low-leveraged in the territory of 1.1x¬1.2x in the next couple of years.

In Fitch’s opinion a constraint for the rating is represented by significant refinancing risks, with the earliest peak in Q209. Though the agency believes that the issuer, being a state-controlled and low-leverage borrower, is likely to raise new debt from the state-controlled banks in Russia, the debt is likely to be rather short-term and therefore refinancing risks would roll over.

The rating considers the influence on strategic decision-making process and potential lobbying support of the main shareholder, state-owned OAO ‘Svyazinvest’.