The rating assigned reflects the federal-scale mobile operator's ability to maintain a steady market position, improvements in cash flows from operations, subscriber base expansion, a high level of support from owners.

Since the consolidation of PJSC Rostelecom's mobile assets was completed in 2014, Tele2 has had firm control over ca. 15% of the subscriber base in Russia gradually increasing its footprint in the market. As of March 31, 2016, the company's subscriber base reached 38.4 million increasing by 3.4 million persons year-on-year. In the fourth quarter of 2015 and the opening quarter of 2016, Tele2's subscriber base increased by 5.1% and 3.0%, respectively. According to AC&M Consulting data, the Company accounted for 46% of the net connections in Russia in the fourth quarter of 2015, 100% of all net connections in the first quarter of 2016.

The higher subscriber base puts the holding in a position to improve its financial performance. According to the Company's consolidated IFRS statements, LLC T2 RTK Holding increased its revenue by 8.3% in 2015 outstripping its competitors. Gross income of Tele2 for Q1 2016 was RUB 24.3 billion increasing by 5.4% year-to-year.

We appreciate the stability of the Company's net cash flow from operations, with notable positive dynamics. In particular, in 2015, net cash flow from operations amounted to RUB 18.7 billion increasing by 5.2% year-on-year. In Q1 2016, the company achieved an even stronger year-on-year increase of +74.9% against the opening quarter of 2015. The growing net cash flow from operations is an evidence of the business model efficiency and contributes essentially to the credit rating of LLC T2 RTK Holding.

Some of the Company's shareholders are representatives of the top league of Russia's financial and corporate sectors: VTB Bank (PJSC), PJSC Rostelecom, JSB Rossiya, etc. This shareholding structure also indicates the Government of Russia's indirect shareholding in the group. Therefore, the resources for financial and operational support of the Company's activities can be regarded as extremely high. In particular, as of March 31, 2016, loans provided by related parties accounted for 80% of the total amount of Tele2's debt obligations.

The key rating constrains for LLC T2 RTK Holding include a high and growing debt burden, weaker profits and lower return ratios, and low balance sheet liquidity.

The Company's loan debt increased by more than RUB 30 billion (43.3%) in 2015. In the first quarter of 2016, the loan debt further increased by 8.3% to reach RUB 111.5 billion on March 31, 2016. Total debt reaches RUB 158.4 billion (64.8% of the balance sheet liabilities). While the Company's liabilities are growing, there are also negative changes in almost all debt burden metrics. In particular, the key NetDebt/EBITDA ratio increased from 3.15 in 2014 to 5.77 on March 31, 2016, the debt (including finance lease obligations) to revenue ratio increased from 0.92 to 1.28. The heavy debt burden remains the most powerful rating constraints for LLC T2 RTK Holding.

The outstripping growth of operating expenses (which equaled the Company's revenue for the 12-month period ending on March 31, 2016) and a higher interest on debt obligations have driven the holding's financial result into the negative zone. In particular, the group posted uncovered losses before and after the profits tax both in 2015 and in the first quarter of 2016. As a result, its interest coverage ratio (ICR) fell to extremely low levels (0.21 on December 31, 2015, 0.02 on March 31, 2016). Return on sales was a mere 2.4% in 2015 (13.2% in 2014), EBITDA margin in Q1 2016 decreased from 22.9% to 12.2% (year-to-year). The Company's negative profitability, shrinking return ratios and low debt servicing capability also notably constrain the rating of LLC T2 RTK Holding.

As of December 31, 2015, the Company's absolute and current liquidity ratios reached 4.1% and 38.5%, respectively, much below the levels generally viewed as comfortable. AK&M Rating Agency views the low balance sheet liquidity as an indirect rating constraint for LLC T2 RTK Holding, seeing as the historically low share of current assets did not prevent the group to meet its short-term obligations on time and in full.

We view the uncertainty as regards potential maintenance and capital expenses arising from the obligation for cellular operators to follow the data processing and storage requirements of the 'Yarovaya anti-terrorist laws' as an additional rating constraint. In the long term, these costs and expenses can produce a negative impact on the financial viability of any market player, including LLC T2 RTK Holding.

LLC T2 RTK Holding is a fast-paced federal-scale cellular operator, one of the so-called Big Four group employing the Tele2 brand. The company is active in more than 60 regions of Russia where it provides services to over 38 million subscribers. In October 2015, the operator started providing 3G and 4G telecommunications services in Moscow and Moscow region. The company is co-owned by Rostelecom (45%) and Swedens's Tele2 Russia Holding AB (55%) controlled by a consortium of investors, including VTB, Bank Rossiya, SOGAZ and Alexey Mordashov. In 2015, Tele2 earned RUB 94.6 billion in revenues, its equity capital reaching RUB 86.0 billion.

This press release is based on the Statement of assignment of a credit rating to LLC T2 RTK Holding. 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 LLC T2 RTK Holding the first time on June 30, 2014. The last rating action was taken on August 19, 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.

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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