Fitch Ratings has revised the outlook on Russia's Mobile Telesystems' MTS Long Term debt rating to Positive from Stable and affirmed the rating at 'BB '. The improvement reflects the revision of the outlook on its controlling shareholder Sistema to Positive.
Fitch noted that MTS is a leading Russian and CIS mobile operator with modest leverage and strong free cash flow generation. It is the largest operator in Russia and the second-largest in Ukraine by subscribers.
On a standalone basis, MTS's credit profile is commensurate with a low investment grade rating. MTS's ratings are notched down for the negative influence of Sistema, MTS's majority shareholder. Under Fitch's methodology, a subsidiary can be generally rated maximum two notches above its parent if the parent-subsidiary linkage is weak.
Robust FCF Generation
MTS sustainably generates positive free cash flow (FCF). Capex as a percentage of revenue has been high (well above 20%) inflated by 3G, and more recently, LTE spending in Russia. Fitch expects this ratio to drop in the medium to long term, but stabilise at a higher level than MTS's European peers, due to lower ARPU.
MNP Not A Threat
The introduction of mobile number portability (MNP) in Russia in 2014 is unlikely to put MTS in a disadvantaged position. Fitch said that it believes that the hardest hit will be operators in the middle, with the lowest priced and market leaders including MTS potentially benefiting from the regulatory change.
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