Fitch: Shyam Risks Reflected in Sistema's Current Ratings

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Fitch Ratings says that Sistema's exposure to debt and losses under the current business plan at its majority controlled subsidiary SSTL (Shyam) in India is already reflected in Sistema's current ratings. A significant rise in investments into Shyam may put pressure on Sistema's ratings but Fitch views this as an unlikely event risk.

Fitch has always treated all obligations with potential recourse to Sistema holding company (holdco) including debt at Shyam as Sistema holdco debt and included it into holdco leverage metrics calculations. Any acceleration of Shyam's debt would not change its treatment by Fitch while Sistema's current liquidity is sufficient to accommodate significant cash redemptions.

Sistema publicly disclosed that it guarantees approximately USD1.5bn of debt at Shyam. Shyam's licenses were revoked by the Indian regulator from September 2012, and, unless the company can find a solution to this conundrum or new regulatory initiatives are announced, it may be forced to stop operations by then. This is likely to trigger an event of default under its obligations, and creditors will be able to accelerate redemption of virtually all outstanding debt.

Fitch views Sistema's current liquidity position as sufficient to absorb accelerated redemptions at Shyam. Sistema reported that cash at the holdco level including highly liquid deposits was USD1,800m covering holdco's 2012 debt maturities of USD681m, potentially releasing above USD1bn of liquidity available at the start of 2012. This will be further boosted by dividends from MTS ('BB+'/Stable) and Bashneft expected to contribute approximately USD0.9bn to Sistema in 2012. Overall, Sistema holdco had a net cash position of USD564m at end-2011.

Winding up Shyam's operations may be credit positive reducing the holdco's exposure to further losses at this entity. Shyam is currently burning cash, it reported USD91m of negative EBITDA (adjusted for USD346m non-cash license impairment charge) in Q411, on top of capex necessary to develop this business. Shyam's operations are primarily funded with debt guaranteed by Sistema. Drawing the line under this business would reduce Sistema's exposure to rising debt at this entity, so that the holdco projected leverage as measured by the ratio of net debt including off-balance sheet obligations to normalised dividends would remain comfortably below 4.3x, an upper limit that Fitch flagged as consistent with the current ratings.

Shyam may continue its operations but significant new investments above what is reflected in the current business plan are unlikely. Shyam is understood to be interested in participating in the new spectrum auction with an aim to at least restore its frequency portfolio. The recent recommendation of TRAI, the Indian telecom authority, set price guidelines for the new auction at up to 10 times higher compared with what operators paid in 2008. Sistema's management commented that the recommended price would not be acceptable. Although the company is likely to be making bidding decisions on a district by district basis, Fitch understands the management is not prepared to pay a significant premium over the USD460m original licence cost, and the management expects this to be offset against new spectrum payments.

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