The credit rating of PJSC «MegaFon» (hereinafter, MegaFon, or the Company) is based on the Company’s leading positions in the mobile communications market, strong business profile, broad geography of operations, and high level of corporate governance. In ACRA’s opinion, the combination of these factors indicate that MegaFon has a strong operating profile. The high assessment of market risks has an additional positive impact on the rating.
ACRA positively assesses the financial profile of MegaFon due to the very high profitability, strong cash flow and very high liquidity. The average leverage assessment has a certain constraining effect on the financial profile, however, the Agency notes that the Company is working on reducing it.
MegaFon is one of the largest telecommunications companies in Russia. It ranks second in subscribers and revenue among mobile communications providers in the country. The key shareholders of MegaFon are companies of the USM Group.
Key rating assessment factors
Leverage is assessed as average and is gradually declining. In 2020, MegaFon’s debt declined by 8% and as of December 31, 2020 it amounted to RUB 347 bln. The Company’s debt is mainly made up of ruble-denominated credit lines. The largest creditor is Sberbank (ACRA rating AAA(RU), outlook Stable). The ratio of adjusted total debt to FFO before net interest payments was 3.2x in 2020 compared to 3.4x in 2019, which corresponds to an average assessment of leverage. ACRA expects this indicator to decline to lower than 3.0x in 2021–2023, given that the Company is carrying out a plan to reduce its leverage. Coverage of fixed payments is also average at 2.7x for 2020.
Stable leading market positions and very large size of business. In 2020, MegaFon changed its method for counting active subscribers, and as a result, their number fell below the previously published level. In 2019, the number of the Company’s subscribers was 69.7 mln according to the new method, while a year earlier 76.9 mln subscribers were reported. In 2020, according to the updated approach, the number of subscribers increased by 0.9% to 70.4 mln. MegaFon continues to be the second largest mobile operator in Russia. The Company’s revenues and FFO before fixed payments and taxes in 2020 were RUB 332 bln and 148 bln, respectively, which indicates very large business size.
Very high liquidity. Following its decision not to pay dividends, MegaFon demonstrates consistently positive free cash flow (FCF), which allows the Company to reduce its leverage and provides support to liquidity. In 2020, the FCF margin was 11% according to ACRA’s calculations. A moderately comfortable debt repayment schedule combined with the sufficient size of open credit lines allows ACRA to strongly assess the Liquidity factor.
Very high profitability. In 2020, MegaFon’s FFO margin before fixed payments and taxes was 45%, which corresponds to a very high level according to ACRA’s methodology. The Agency expects the Company to maintain this indicator at a similar level in 2021–2023. According to ACRA’s assessments, the size of MegaFon’s total ARPU (average revenue per user) is slightly lower than the ARPU of its direct competitors, but is still at a moderately high level.
- Changes in ARPU below 1.5%;
- Consistent decline in leverage;
- Positive FCF;
- Subscriber base remaining stable.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Decrease in lease-adjusted total debt to FFO before fixed payments below 2.0x or increase in FFO before fixed payments to fixed payments above 5.0x.
A negative rating action may be prompted by:
- Increase in lease-adjusted total debt to FFO before fixed payments above 3.5х with a decrease in FFO before fixed payments to fixed payments below 2.5x;
- Decrease in FFO before fixed payments and taxes below 40%;
- Significantly less access to external liquidity sources with a decrease in FFO before fixed payments to fixed payments below 2.5x;
- Increase in capital expenditures above planned levels with increased leverage and deteriorating debt coverage;
- Deteriorating corporate governance practices (including information transparency).
PJSC «MegaFon» (RU000A0ZYC98), maturity date: October 3, 2022, issue volume: RUB 15 bln — AA(RU).
PJSC «MegaFon» (RU000A1002P4), maturity date: January 31, 2022, issue volume: RUB 20 bln — AA(RU).
PJSC «MegaFon» (RU000A1006G4), maturity date: March 11, 2024, issue volume: RUB 5 bln — AA(RU).
PJSC «MegaFon» (RU000A1006H2), maturity date: March 11, 2024, issue volume: RUB 5 bln — AA(RU).
PJSC «MegaFon» (RU000A1009A1), maturity date: April 6, 2026, issue volume: RUB 10 bln — AA(RU).
Credit rating rationale. The issues represent senior unsecured debt of MegaFon. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. According to ACRA’s methodology, the credit rating of the issues is equivalent to that of MegaFon, i.e. AA(RU).
The credit ratings have been assigned to PJSC «MegaFon» and the bonds (RU000A0ZYC98, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings assigned to PJSC «MegaFon» and the bonds (RU000A0ZYC98, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» were published by ACRA for the first time on September 21, 2017, October 9, 2017, February 4, 2019, March 18, 2019, March 18, 2019, and April 15, 2019, respectively. The credit rating of PJSC «MegaFon» and its outlook and the credit ratings of the bonds (RU000A0ZYC98, RU000A1002P4, RU000A1006G4, RU000A1006H2, RU000A1009A1) issued by PJSC «MegaFon» are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by PJSC «MegaFon», information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited, and PJSC «MegaFon» participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided additional services to PJSC «MegaFon». No conflicts of interest were discovered in the course of credit rating assignment.