CJSC AK&M Rating Agency confirmed the ‘B++' credit rating (positive outlook) assigned to OJSC Sistema Mass-media as per the national scale.
The ‘B++' rating indicates that OJSC Sistema Mass-media is qualified as a sufficiently reliable borrower (the highest sub-grade of the ‘B' grade). Risk of a delay in meeting liabilities is moderate, restructuring risk for the loan / part of the loan is insignificant.
A strong argument supporting the rating score is the powerful owner. The company's principal ultimate owner is OJSC JSFC Sistema. Mobilizing funds to finance its activity and investment strategy, the company may rely on the assistance of its owner possessing considerable financial capacities.
The improving liquidity indicators also support the rating score. Current liquidity ratio increased to 1.56 in 2010 from 1.24 in 2009. As of 9/30/2011, it grew to 2.31 driven by a decrease in short-term liabilities outstripping the reduction in current assets. The absolute liquidity ratio also rose to 1.02 in 2010 from 0.76 in 2009. In 2011, it further advanced to 1.20. The company's current assets are sufficient to cover its short-term liabilities, which is a positive argument seeing the high volatility of macroeconomic parameters.
One of the highlights influencing the rating of OJSC SMM is the increasing revenue and decreasing debt burden. In 2010, SMM's revenue was RUB 2,863 million growing by 4% year-on-year. The revenue growth was driven by the increasing proceeds from sales of the movie content including the additionally exercised rights to broadcast soap operas in the CIS, as well as the increasing revenue from the distribution and content aggregation activities. The result achieved for 9 months 2011 assumes that the upward trend in the company's income will rule as of the end of 2011.
SMM's consolidated debt (credits and loans) as per US GAAP is on the downward trend. In 2010, the company's consolidated liabilities decreased by 37.4% to $97.7 million from $156.2 million in 2009. In 2011, the debt burden continued to shrink: as of 9/30/2011, the company's consolidated debt decreased by 12.5% year-to-date to $85.5 million.
The ratios representing the company's debt burden naturally declined in 2010. The share of liabilities in the company's assets decreased from 0.44 in 2009 to 0.36 in 2010 and to 0.33 as of 9/30/2011. Debt to equity ratio was about 0.8 in 2010-2011 against 1.18 in 2009. The decreasing debt burden is certainly supportive for the rating.
Another argument for the rating score is the favorable debt structure of OJSC SMM represented by a high share of long-term liabilities. As of the end of the third quarter 2011, consolidated long-term liabilities accounted for 98%, short-term liabilities for 2% of the company's total liabilities. The prevalence of long-term obligations in the debt structure reduces the short-term debt burden and improves the company's financial soundness. The share of credits and the loans denominated in foreign currencies, is low (8%), which is also favorable, seeing the exchange rate fluctuations and the lack of stability in global financial markets.
One of the risk factors, however, is the availability of losses, in many respects down to certain changes in some of the company's business priorities and investing in projects at their early stages, along with a number of crisis phenomena in the economy. Pre-tax profit and net profit are still negative, with a loss reduction trend established in 2010-2011. It will also be noted that operating profit of OJSC SMM for 2010 was $2.2 million against a loss of $51.5 million for 2009. For 9 months 2011, the company's operating profit exceeded the result achieved over the whole year 2010 reaching $2.5 million. With these trends in mind, we may see the company post a positive net profit in 2012.
The company's debt to operating income is high and constitutes a risk factor. In 2010, SMM's liabilities on credits and loans to OIBDA ratio was 2.41 and increased to 3.2 as of September 30, 2011.
SMM's debt to revenue ratio for 2010 was 1.0 showing that the gross cash flow is comparable to the amount of liabilities (for reference, this ratio was 1.8 in 2009). In 2011, the debt to revenue ratio did not change, aggregate short-time liabilities to revenue ratio equaled 0.02. These data indicate that the company's revenue is above its short-term liabilities but below its total liabilities.
Another risk factor is the growing share of non-current assets and the decreasing assets as a whole. In 2010, non-current assets decreased by 5.8%; current assets by 36.3%. As of the end of the third quarter 2011, current assets decreased by 10.5% year-to-date, with just a minor growth in long-term assets. The share of current assets in SMM's total assets decreased from 61.5% as of December 31, 2009 to 51.9% as of December 31, 2010 and further to 48.7% as of September 30, 2011.
OJSC Sistema Mass-media managing JSFC Sistema's media assets is one of the large Russian players in the market of content for pay television networks and other media resources. The company specializes in the production of content, aggregation and distribution of content for various platforms.
OJSC SMM owns and manages STREAM Television Company (production and aggregation of content), Russian World Studios (producing movies and soap operas in its own studios), Maxima Communication Group (advertising), and Digital Television Broadcasting / DTV (television broadcasting in the automobile television segment).

This press release is based on the statement of assigning a credit quality rating to OJSC Sistema Mass-media.
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.
AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010).
AK&M Ratings are recognized by the Central Bank of Russia (for providing unsecured lending facilities – Provision 323-P), Vnesheconombank (for granting subordinated loans) and SME Bank (for its program of lending to SME businesses), RUSNANO (when selecting banks to provide business banking services to project and engineering entities implementing investment projects), the MICEX (as a prerequisite for including bonds in the Corporate Bond Index / MICEX CBI and Municipal Bond Index / MICEX MBI calculation base, for listing bonds and for providing access to the MICEX+ trading mode). Pursuant to an order of Russia's Government AK&M Ratings count for approving the capitalization increase procedure for banks. Besides, AK&M Rating Agency is recognized by AHML and accredited by SRO National Securities Market Association.

CJSC Analysis, Consulting and Marketing Rating Agency
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Moscow, Russia
www.akmrating.ru
Press release by: Y.B. Kuznetsova
Phone no. (495) 916-70-30, fax no.: (499) 132-69-18.