The ‘A+' rating indicates that JSFC Sistema is qualified as a highly reliable borrower. Risk of a delay in meeting liabilities is insignificant.

One of the drivers promoting the rating score is the impressive revenue and income the Company has achieved. For 9 months 2011, JSFC Sistema's consolidated revenue as per US GAAP was USD 25.6 billion. Over the last two days, JSFC Sistema's quarterly consolidated revenues have been steadily growing. The debt to revenue ratio has recently improved. The ratio of cumulative debt liabilities (credits & loans) as of October 1, 2011 to revenue for three quarters 2011 is 0.58 (against 0.82 in 2009), the ratio of short-term debt ratio being 0.11 (against 0.23 in 2009). Interest coverage ratio (EBIT to interest ratio) for 9 months 2011 was 2.6.

One of the major arguments for the high rating is the efficiency of the company's primary activity and its good pace of development. Over the last two year, JSFC Sistema has been achieving ever higher key performance indicators and growing incomes, while its margin rate is also quite respectable. Return on assets (ROA) as of the end of the third quarter 2011 increased to 1.77% (1.67% for the same period in 2010), return on equity (ROE) to 5.28% (4.96% for the same period in 2010), return on invested capital (ROIC, applying AK&M Rating Agency's proprietary estimation procedure) to 2.86% against 2.72% for the same period in 2010. For three quarters 2011, JSFC Sistema's operating profit totaled USD 3.7 billion increasing by 2% year-on-year. OIBDA profit showed a more impressive growth for the same period (+7% to USD 6.3 billion as of the end of the third quarter 2011) while earnings before interest, taxation and depreciation (EBITDA) increased by 3% exceeding 6 billion US dollars.

Net profit, the principal efficiency indicator, also showed a good rise growing by 7% year-on-year at the end of the third quarter 2011. At the same time, it will be noted that the growth was mainly driven by the company's Core Assets business unit.

JSFC Sistema's assets at the end of the third quarter 2011 reached USD 42.7 billion, equity capital was USD 14.3 billion, thus increasing 3% and 1%, respectively, year-on-year.

Another matter favorable for the rating score is the diversity of JSFC Sistema's business activities. The companies controlled by JSFC Sistema are engaged in various industries: telecommunications, fuel and energy, banking, trade, high technologies, medicine and other sectors. This diversity reduces volatility of cumulative cash flows and increases immunity against industry-specific risks.

The favorable debt profile also supports the rating score. Long-term loans, the most reliable financing method in the way of investment activity, account for the greater part of JSFC Sistema's portfolio, which reduces the short-term debt burden and increases financial soundness. The share of short-term debt liabilities in the debt portfolio has been steadily decreasing and the long-term liabilities have been steadily increasing since 2008. While long-term loans accounted was 65% of the cumulative debt liabilities in 2008, they reached 73% in 2009, 79% in 2010, and 81% at the end of the third quarter 2011. Besides, the share of loans denominated in Russian rubles is on the rise cutting down foreign currency-related risks which are always there as long as the financial markets are lacking stability. While the share of Sistema's loans denominated in Russian rubles was approximately 60% in 2009, it reached 71% at the end of the third quarter 2011.

The debt burden on the company is average, with a minor downward trend. According to JSFC Sistema's consolidated US GAAP reports, its liabilities represented by credits and loans decreased by over 3% to USD 14.9 billion by the end of the third quarter 2011. The decreasing liabilities coupled with the growing profit resulted in the improving cash-debt coverage ratio. The ratio of debt to EBITDA and OIBDA at the end of the third quarter 2011 was 2.5 and 2.4, respectively. For the short-term debt liabilities, these ratios are still far lower.

As a whole, the JSFC Sistema's debt to equity ratio have been decreasing (i.e. improving) recently. In particular, it was 1.14 in 2008, 1.10 in 2009, 1.08 in 2010 and decreased to 1.04 by the end of the third quarter 2011. The actual debt burden ratio also decreased to 0.51 by the end of the third quarter 2011 from 0.53 in 2010. This establishes a decreasing debt burden trend further supporting the rating. In conclusion, it will be acknowledged that the company's incomes ensure full, comfortable and timely discharge of all its obligations.

At the same time, despite the appearing decreasing trend in the amount of the company's debt liabilities, Sistema's total accounts payable are still considerable which is restrictive on the financial corporation's rating.

The mission of the financial corporation is primarily to invest efficiently in promising business spheres – which sometimes requires borrowing funds in the capital market to further invest them. The result is that JSFC Sistema is in a certain sense depending on the macroeconomic situation which also produces a restrictive impact on the rating score. Where and as necessary, JSFC Sistema widely resorts to considerable amounts of borrowed funds which increases risks of deteriorating borrowing conditions in the tumultuous economic environment. With decreasing credit volumes or growing interest rates in the wake of adverse market conditions may produce a negative impact on Sistema's business environment.

Another restriction on JSFC Sistema's rating score is that some of the corporation's entities generate negative cashflows. Most of the companies across the Developing Assets business unit posted losses at the end of the third quarter 2011 which affected the income and profit of the whole corporation. In many respects, it is these companies' developing image that works against them – certainly, without prejudice to the negative impact of the economic crisis. (primarily in the consumer segment).

JSFC Sistema is one of the largest public diversified corporations in Russia managing major public assets in various business domains. Companies controlled by JSFC Sistema, among them OJSC MTS, MTS-Bank, VAO Intourist, OJSC Sistema Mass Media, Detskiy Mir Group, Joint Stock Oil Company Bashneft, OJSC Bashkirenergo, OJSC Dalcombank, CJSC Binnopharm, OJSC RTI and others, provide services to over 100 million consumers in Russia, the CIS countries, Eastern and Western Europe.

This press release is based on the statement of assigning a credit quality rating to OJSC JSFC Sistema.

The rating score, along with any information and conclusions provided in this press release, only conveys our opinion on the company's reliability and shall not be considered as advice on the purchase and sale of securities or the provision of loan facilities.

AK&M Rating Agency will not incur any responsibility for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.

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Press release by: A.G. Chumachenko

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