Fitch: Liquidity concerns for Russian telecoms

Fitch Ratings said that weak liquidity management and a high reliance on short-term financing are key credit constraints for Russian fixed-line telecom incumbents.

Fitch said it views the reliance on short-term debt as a negative rating factor because it exposes Russian telecom incumbents to significant refinancing risks. In the current tight debt market, environment liquidity issues are a major concern.

As Russian telecoms incumbents are ultimately controlled by the government, they benefit from strong relationships with state-controlled banks, such as Sberbank (rated BBB+ with stable view) and VTB (rated BBB+ with stable view). Fitch expects these banks will continue to be key lenders to the industry.

Individual liquidity and refinancing risks differ significantly across the industry. North-West Telecom (rated BB- with stable view) benefits from considerable cash inflow after it sold its 15% stake in Telecominvest for $410 million in October 2007, while Volgatelecom's (rated BB- with stable view) debt maturities are well-spread with a modest 1.5x net debt-to-EBITDA ratio at the end of 2006.

Refinancing risks are much higher for Uralsvyazinform (rated B+ with stable view) and Sibirtelecom (rated B+ with stable view) with short-term debt accounting for 42% and 49%, respectively, of total at the end of the first half of 2007. The share of short-term debt at Centertelecom (rated B with positive view) was at an acceptable 16% at the end of the first half of 2007, although this is compromised by its lower flexibility to cut capital expenditure, given relative under-investment in 2005-2006. At the end of September 2007, 27% of Dalsvyaz's (rated B+ with stable view) debt was short-term while its leverage was moderate at 1.8x at the end of 2006, mitigating refinancing concerns.

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