OREANDA-NEWS. Fitch Ratings has affirmed JSC Transtelecom Company's (TTK) foreign and local currency Long-term Issuer Default Ratings (IDR) at 'B+' and National Long-term rating at 'A-(rus)' and maintained a Negative Outlook on these ratings. TTK's senior unsecured debt has been affirmed at 'B+'/'RR4' and domestic senior unsecured debt at 'A-(rus)'.

The Negative Outlook reflects significant execution risks of the company's strategy to increase broadband customer penetration on already covered territories and improve margins and cash flow generation. Average revenue per user (ARPU) and penetration growth may be susceptible to the deteriorating macroeconomic outlook for Russia.

TTK operates a large-capacity fibre backbone network laid along Russian railways. It holds established positions in the inter-operator segment, and pursues a strategy of diversifying into end-user broadband services. The company operates under an asset-light business model and depends on its shareholder for leasing the core fibre network.

The company significantly curtailed its broadband expansion ambitions in mid-2014 aiming to improve cash flows and reduce leverage. In Fitch's view, the new strategy should allow the company to delever to approximately 4x funds from operations (FFO) adjusted net leverage by end-2015. However, the margin for error within the current rating level is small. A failure to increase customer penetration of covered territories on a par with peers in similar locations and/or ARPU pressure on the back of difficult macroeconomic situation in Russia may compromise deleveraging efforts.

The new strategy envisions an abrupt end to new broadband development. Instead, continuing marketing efforts to sell newly built broadband lines should lead to a steady increase in customer penetration. In view of a fast network expansion on previously uncovered territories in 2012-2014, Fitch believe these are realistic expectations. Customer growth should improve operating cash flow and, coupled with a dramatically reduced capex, would pave the way for deleveraging. However, a change of strategy entails substantial execution risks reflected in the Negative Outlook.

A change in strategy was driven by the unfavourable regulatory situation and rising interest rates which reduces the number of commercially attractive broadband development projects, particularly small ones. Rostlelecom (BBB-/Stable), the fixed-line incumbent, was chosen as the only operator for a government-sponsored project to bridge the digital divide in less developed Russian territories. This promises to significantly increase competition in TTK's targeted areas - the company was going to capitalise on its backbone infrastructure laid along railways across the country by building short network extensions to underpenetrated territories.

RATING SENSITIVITIES
Negative: Insufficient broadband growth, ARPU declines and/or additional pressures in the inter-operator segment leading to a sustained rise in leverage to above 3.0x net debt/EBITDA and 4.0x FFO adjusted net leverage without a clear path for deleveraging will likely lead to a downgrade. Liquidity and refinancing pressures may also be negative.

Positive: Ratings may be stabilised if the company manages to improve EBITDA generation in the broadband segment and reduce leverage to below downgrade triggers.