OREANDA-NEWS. March 22, 2010. Fitch Ratings has 2 March 2010 upgraded OAO Centertelecom, OAO North-West Telecom, OJSC Volgatelecom and  OAO Sibirtelecom, to ‘BB’ with Stable Outlook.  The agency also upgraded OAO Uralsvyazinform to ‘BB-’ and affirmed OJSC Far East Telecom (also known as OAO Dalsvyaz) at ‘BB-’. Uralsvyazinform (Urals) and Far East Telecom were assigned Positive Outlooks. The full list of rating actions appears below.

These companies are regional incumbent telecoms operators in Russia, and all are operating subsidiaries of OJSC Svyazinvest, a Government-controlled holding company.

The ratings reflect significantly improved liquidity and lower refinancing risks of the incumbents, while their financial and operating performance remains robust and leverage low. Urals and Far East Telecom are facing higher refinancing risks than other operators; however the Positive Outlook on their ratings reflects Fitch’s expectation that this will be successfully addressed in the short-to-medium term. Fitch also notes that all of the incumbents have benefited from a more streamlined financial and operating strategy across Svyazinvest group. There is a strong potential for more synergies if a proposed Svyazinvest restructuring to merge all of its operating subsidiaries into a single company is successfully implemented.

The incumbents’ operating and financial performance proved strongly resilient in the downturn, with revenues growing, margins improving and subscriber base and telecoms usage broadly stable. Most operators demonstrated an impressive flexibility to significantly cut capex, which allowed them to dramatically improve free cashflow (FCF) generation and source cash for debt service. Although Fitch does not expect that 2009’s exceptionally high FCF margin can be maintained in the long run, the proportion of revenues spent on capex is likely to be lower than in the past with positive implications for FCF. However, there remains a limited visibility over the sustainable level of required capex in the long run which may jeopardise FCF generation.

Generally, Fitch expects that strong cost control will be maintained, supporting margins. A positive factor for many incumbents is a substantial cash contribution from the Universal Service Fund (USF), with the amount of transfers locked in until 2013. USF sponsors certain telecoms services that are not economic to provide on a stand-alone basis.

Overall 4%-6% revenue growth appears the most likely scenario for most of the incumbents. This growth profile is shaped by three main factors. Firstly, rapidly rising broadband penetration across the country. The incumbents are likely to strongly benefit from this as they are almost monopoly providers in many regions of the country, particularly outside large cities. Secondly, stable voice usage and fixed-line subscriber base with regulatory tariff increases on local service projected in the range of 7%-9% (slightly below CPI) and voice revenues correlating to this; and finally, declining interconnect and intra-zone traffic and revenues.

The incumbents’ market shares remain strong, particularly as smaller players were harder hit by the financial crisis. Svyazinvest subsidiaries are likely to increase their market share in the broadband segment as they capitalise on their effective control over the ‘last mile’ infrastructure – this provides them with an opportunity to roll-out ADSL-based service ahead of competition. The regulatory environment remains benign for the incumbents, and this is unlikely to change with the proposed industry reorganisation.

Leverage was improving throughout 2009 and is estimated by Fitch at below 1.5x ND/EBITDA for all operators which is strong for their rating category. The incumbents’ financial and operating strategies are highly influenced by their majority shareholder Svyazinvest. The holding has demonstrated a more streamlined approach to its subsidiaries than prior to 2009 with liquidity and debt management issues handled in a more conservative manner across the group.