CJSC AK&M Rating Agency affirmed the national scale credit rating of OJSC Tele2-Saint-Petersburg at 'A+'. The outlook is stable.

The 'A+' rating indicates that the Company is highly creditworthy. Risk of a failure to meet obligations in time is insignificant.

OJSC Tele2-Saint-Petersburg is one of the backbone business units of Tele2 Russia, Russia's fourth largest mobile operator. In the spring of 2013, VTB Group acquired 100% of the Company's shares from Sweden-based telecom concern Tele2 AB; in December 2013, VTB resold a 50% stake in the operator to a consortium of investors including Bank Rossiya and entities of Severstal owner Alexey Mordashov.

Early February saw the signing of the anticipated framework agreement for the merger of OJSC Rostelecom's mobile assets and Tele2 through the setting-up of joint venture T2 RTK Holding in which Rostelecom will hold 45%, Tele2 55%. The merged company providing services under the Tele2 brand is expected to have picked up ca. 56 million subscribers and captured up to 25% of Russia's mobile telephony market by 2018.

At the first stage of this process, Tele2 assumed control over the operations and finances of Rostelecom's seven subsidiaries providing mobile telephony services. At the second stage, Rostelecom will contribute its wholly owned subsidiary CJSC RT-Mobile uniting Rostelecom's remaining unbundled mobile assets, along with LTE licenses worth a total of RUB 27 billion to the joint venture.

The joint venture with a state-owned company offers ample development opportunities for mobile discounter Tele2 including a qualitative breakthrough, primarily through licenses for telecommunications services in Moscow region and access to radio frequencies for rolling out 4G mobile networks. Analysts estimate the synergy from the joint venture as a very positive effect. The stronger market position of the parent company will obviously improve its financial stability and help some of its business units including OJSC Tele2-Saint-Petersburg expand.

In 2013, OJSC Tele2-Saint-Petersburg's financial performance was moderately high. Revenue amounted to RUB 10.7 billion increasing by 6.0% year-on-year. Gross profit grew by 8.3%, sales profit by 15.7%. Also, the Company improved some profitability metrics (OIBDA margin, return on sales). We tend to regard the negative profit in the first quarter of 2014 as a local event caused by the specific character of an agreement to provide a loan to its subsidiary (Financial Company T2 RUS LLC), not producing a substantial impact on the stability of the Company's financial profile.

It should also be noted that in 2013, the Company almost entirely restored its equity capital after a major reduction following the payment of 2011 and 2012 dividends. The Company's steady position in the market of telecommunication and telematic services of Northwest Russia coupled with its relatively high business performance is one of the key positive rating drivers.

The high amount of long-term financial liabilities (RUB 19 billion) arising from the issuer's bonded loans placed in 2011-2012 is still a major risk factor for Tele2-Saint-Petersburg. As of January 1, 2014, the Company's net debt to EBITDA multiple was 5.3x. At the same time, most of the borrowed capital was converted into financial investments (long-term loans) with shorter tenors and interest rates exceeding the bond coupon rates. Besides, we appreciate the reduction in the total loan debt by 7% in the first quarter of 2014 as an advantage for the Company.

We highlight the traditionally poor liquidity position and moderately weaker return on assets and return on equity ratios as further challenges for the Company resisting a higher rating.

OJSC Tele2-Saint-Petersburg (full name: OJSC Saint-Petersburg Telecom) is one of the backbone business units of Tele2 Russia, Russia's fourth largest mobile operator. Being a large and fast-paced Russian provider of mobile telephony services, the Company is licensed for operations in the Northwestern Federal District). As of April 1, 2013, Tele2-Saint-Petersburg's assets amounted to RUB 28.6 billion, equity capital totaled RUB 2.46 billion. The Company's auditor is CJSC Deloitte & Touche CIS.

This press release is based on the Statement of assignment of a creditworthiness rating to OJSC Tele2-Saint-Petersburg.

The rating assigned, along with any information and conclusions provided in this press release, only conveys our opinion on the Company's creditworthiness and shall not be construed as a recommendation to purchase or sell securities, or to lend funds to the Company.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

CJSC AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. CJSC AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010) and is on the Central Bank of Russia's Register of Accredited Rating Agencies.

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