The key positive factors which continue supporting the high rating of Sistema JSFC is the low debt burden, the acceptable interest coverage, the relatively high business profitability and the comfortable structure of the debt liabilities assumed by the Company.

Despite the forfeiture of one of its key business units due to force-majeure circumstances, the corporation preserved the high stability of its financial profile while maintaining a comfortable debt burden. In 2014, consolidated net debt to EBITDA multiple was 1.3x, continuing to indicate the high potential of the holding's creditworthiness. This multiple reflects the reduction in total loan debt from USD 10.5 billion to USD 8.3 billion in the accounting year) and the relatively high business profitability of the group (OIBDA margin was 26.1% in 2014).

While the interest coverage ratio, one of the key debt burden indicators assessed by AK&M Rating Agency, decreased from 3.6x to 1.7x, we do not tend to regard this as a major source of pressure on the creditworthiness of JSFC Sistema believing that the ICR still falls within the Company's current rating – as evidenced by the acceptable ratio of forthcoming aggregate loan servicing payments (USD 1.6 billion until the end of the first half of 2016) and potential monetary resources the Company may resort to (consolidated retained earnings of the holding in 2014 was USD 4.2 billion, the positive cash flow balance reaching USD 2.1 billion).

One of the key positive rating arguments for the creditworthiness of Sistema JSFC is its comfortable debt profile. The relative weight of short-term loan debt in the Company's total debt decreased to 18% as of March 31, 2015 from 21% at the end of 2014. The relative share of the loans receivable denominated in the holding's functional currency (the Russian ruble) is 58%.

Besides, the credit rating of Sistema JSFC is supported by the group's higher business activity resulting in an increase of a variety of activity ratios (from 0.43 to 0.52 for equity, from 9.7 to 11.9 for debt receivable).

While appreciating the strong points of Sistema's current activity, AK&M Rating Agency believes it reasonable to affirm the negative outlook on the rating, given the persistently high infrastructure risks arising from the group's shrinking business volume and narrower diversification. 

In particular, consolidated revenue of Sistema JSFC for 2014 (earned by the business units operating within Sistema at the start of 2015) decreased by 10% (consolidated revenue in Russian ruble terms increased by approximately 7%), and the group posted a net loss of USD 4 billion (the bulk of it being attributable to the loss from deconsolidation of JSOC Bashneft which Sistema recognized in the income statement). That said, the share of the largest business segment in gross incomes went up from 51% at the end of 2013 to 60% on March 31, 2015, OIBDA-based concentration for the same period increased from 63% to 93%. The dependence of Sistema's financial performance on operating results of the holding leader Mobile TeleSystems OJSC (MTS) has increased considerably, which AK&M Rating Agency regards as a source of pressure on Sistema's credit rating.

Besides, the group's financial performance in the first quarter of 2015 leaves a rather ambiguous impression. According to the consolidated IFRS statements (denominated in Russian rubles), the corporation improved revenue by 17% year-on-year, but its profit before tax and settlement with Ural-Invest LLC plummeted almost 3 times. Only 8 of 13 Sistema JSFC's consolidated assets achieved profitability in terms of OIBDA. The above-stated circumstances give rise to uncertainty as regards the Company's medium-term financial performance which AK&M Rating Agency continues monitoring closely.

Established 1993, Sistema JSFC is the largest publicly traded diversified financial corporation in Russia and the CIS with large assets in various sectors of economy. Companies controlled by Sistema JSFC are operating in Russia, other CIS countries, East and West Europe providing services related to telecoms, hi-tech, fuel & energy, petrochemistry, radio and space technologies, banking, retail trade, mass media, travelling and healthcare to more than 100 million consumers. The companies in which Sistema JSFC exercises control are active in not only Russia, but also other CIS countries, Eastern and Western Europe as well as the Asian region. According to the consolidated US GAAP statement as of the start of 2015, assets of Sistema JSFC totaled US 20.7 billion, equity capital was 2.9 billion US dollars.

This press release is based on the Statement of assignment of a credit rating to Sistema JSFC. The rating assignment is based on the Credit Rating Methodology for Corporates (Issuers) and Financial Assets adopted on January 23, 2014 at a session of the Rating Committee of AK&M Rating Agency.

The rating, 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.

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. 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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