The rating reflects the mobile provider's ability to maintain a steady market position, stability of cash flows from operations, moderately high business profitability, acceptable current debt coverage, improvements in a variety of balance sheet and operating performance indicators.

The 12-month revenue of OJSC Tele2 - Saint-Petersburg has exceeded RUB 10 billion for the last four years, an evidence of the Copmany's subscriber base stability and attractive tariff policy. In the opening quarter of 2016, the Company's gross income increased by 3% (year-to-year), which, given the tough market competition and higher-than-average penetration of mobile communications services in the operator's activity area, can be regarded as a positive rating driver.

For the 12-month period ending on March 31, 2016, EBITDA margin of OJSC Tele2 - Saint-Petersburg was 51.2%, return on equity reached 49.2%, far above the average levels in the Russian corporate segment. The EBITDA margin and ROE, as well as return on sales and OIBDA margin improved in the first quarter of 2016.

Despite a heavier debt burden in 2015 (the loan debt increasing by 25.1%) and, consequently, interest payments on the loan, the Company keeps interest coverage within acceptable limits. In particular, as of March 31, 2016, its interest coverage ratio (ICR) was 1.53 (1.55 at the start of 2015), the EBITDA to interest payable ratio reached 1.97 (1.95 as of January 1, 2015). The Company's ability to successfully to effect the current payments arising from its debt liabilities contributes essentially to the issuer's credit rating.

In the period from January 1, 2013, the Company's capital increased from RUB 803 million to RUB 2,994 million, i.e. 3.7 times, despite the payment of dividends in the amount of RUB 1,650 million in August 2015. For the same period, assets of OJSC Tele2 - Saint-Petersburg increased by almost RUB 10 billion (34%), while the growth rate on the liabilities side was 16%). The above-stated evidences that the mobile operator has chosen a correct business development vector, which is a positive rating driver for the Company.

The rating is also supported by the magnitude of the Company's support from related parties. The sole shareholder of the issuer is beneficially owned, among others, by leading players in Russia's banking and corporate sectors (PJSC Rostelecom, JSC VTB Bank, JSB Rossiya, etc. This shareholding structure also indicates the Government of Russia's indirect shareholding in OJSC Tele2 - Saint-Petersburg. Therefore, the resources for financial and operational support of the Company's activities are regarded as extremely high.

At the same time, the rating of OJSC Tele2 - Saint-Petersburg is constrained by a heavy debt burden, a persistently weak liquidity position, lower financial performance.

The rated Company's debt burden has become substantially heavier since the first bonds were placed to finance the development of Tele2 Russia Holding in 2011. As of March 31, 2016, the total amount of bonds in circulation (the face value plus the accued coupon yield) and the bank loans taken by the Company was estimated at RUB 30,667 million, i.e. almost 80% of the balance sheet liabilities. The net debt to EBITDA multiple (excluding the issuer's accounts payable) was extremely high (5.71x). It should also be noted that the Company's debt liabilities exceeded its annual revenue almost almost three times. The heavy debts the Company is saddled with remains the key rating constraints for OJSC Tele2 - Saint-Petersburg. 

The long maturity of Tele2 - Saint-Petersburg's financial investments and the high accounts payable considerably exceeding its accounts receivable result in a rather weak liquidity position of the issuer. In particular, in the first quarter of 2016, the Company's  current and absolute liquidity ratios were a mere 8.6% and 0.2%, much below the levels generally viewed as comfortable. That said, we expect the Company's liquidity to improve in the first half and in the 12-month period of 2016 following the partial repayment of bonded loans (reclassified as short-term debt 12 months prior to the buy-back offer) and the conversion of the remaining debt into long-term liabilities.

Despite an increase in net profit earned by OJSC Tele2 - Saint-Petersburg in 2015 (+35.4%), there is a distinct downward trend in the Company's financial performance on the longer-term horizon, as evidenced by a notable decline in the 3-month profit in 2016 (by almost 39% year-on-year). In our view, one of the key reasons for the weaker profit performance, is the growing cost of service, given insignificant fluctuations in the company's revenues. This is partially attributable to higher depreciation charges due to an increase in the total value of fixed assets resulting from the development of new 3G and 4G networks and equipment modernization efforts.

Besides, we are concerned about the possible effects of the so-called 'Yarovaya Laws' (a package of anti-terrorits laws passed in Russia) which, if enacted, will entail a dramatic increase in capital expenses and operating expenses of the cellular operators.

OJSC Tele2 - Saint-Petersburg is one of the backbone structural units of Tele2, the fourth biggest Russian mobile telephony services provider in terms of the subscriber base, taking the lead in the business growth rates. According to AC&M Consulting, Tele2's share of the Russian mobile telephony market reached 15% in 2015. The company's sole shareholder is T2 RTK Holding LLC. OJSC Tele2 - Saint-Petersburg provides telecommunications services in St. Petersburg and Leningrad region, in Nenets autonomous area, Republic of Karelia, Pskov and Vologda regions.

This press release is based on the Statement of assignment of a credit rating to OJSC Tele2 - Saint-Petersburg. The rating assignment is based on the Credit Rating Methodology for Corporates (Issuers) and Financial Assets (AK&M Rating Agency, 2015).

AK&M Rating Agency assigned a credit rating to OJSC Tele2 - Saint-Petersburg for the first time on May 23, 2011. The last rating action was taken on July 23, 2015. All rating action announcements are available on the www.akmrating.ru website.

The rating is valid until July 2017. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the Company's creditworthiness are revealed.

For estimation purposes, we completely rely on the reliability of information provided by the Company. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.

The credit rating, along with any information and conclusions provided in this press release, only conveys our creditworthiness opinion 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.

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

AK&M Rating Agency

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www.akmrating.ru

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