Fitch upgrades MegaFon

Fitch Ratings said it upgraded OAO MegaFon's senior unsecured foreign currency rating to BB from BB-, its national senior unsecured rating to AA(rus) from AA-(rus), its domestic RUB3 billion bond to AA(rus) from AA-(rus) and the $375 million bond issued by MegaFon SA and guaranteed by OAO MegaFon to BB from BB-. The short-term rating was affirmed at B.

The outlook is stable.

Fitch said the upgrade reflects MegaFon's well-established position as a nationwide mobile operator in Russia strong financial performance: its EBITDA margin improved to over 44% in 2005 from 42% in 2004, its cellular coverage in its licensed territories and subscriber base have grown rapidly and revenue increase by 67% in 2005, following a 119% increase in the year before while revenue was up 82% in 2004. Growth is likely to extend into 2006 and beyond, based on the continued expansion of the Russian mobile market, the agency predicted.

Fitch noted, however that MegaFon's narrow focus on the middle market and conservative definition of active subscribers may deprive the company of valuable business opportunities offered by the mass market segment. The company continues to lag its nationwide competitors in terms of network coverage and capacity because of its relatively late market entry, although it has substantially reduced the gap with its peers.

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