Telecom Operator VF Ukraine Ratings Affirmed At 'B' Despite Improved Country Risk; Outlook Stable

  • Our country risk assessment for Ukraine has improved because its economic fundamentals have rallied and the government is making legislative efforts to improve the business environment.
  • However, as the economic forecast on Ukraine is broadly unchanged, the domestic telecom sector is unlikely to see a material change in the factors supporting industry growth.
  • As a result, our base case on PrJSC VF Ukraine remains unchanged. We are affirming our issuer credit rating on VF Ukraine at 'B' and our 'B' issue rating on the loan participation note (LPN) issued by VF Ukraine's financing vehicle, VFU Funding PLC.
  • The stable outlook indicates that we expect revenue to grow by more than 10% and the company's S&P Global Ratings-adjusted EBITDA margin to rise above 50% in 2020 and 2021. Adjusted debt to EBITDA is forecast to stay below 3x and free operating cash flow (FOCF) to debt to be about 10%.
LONDON (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above.

We revised the country risk assessment on Ukraine to '5' (high risk) from '6' (very high risk)

The authorities have demonstrated improved macroeconomic management; for example, the National Bank of Ukraine has lifted most of its capital controls. Successive governments have also implemented legislation to tackle corruption and improve the business environment (see "Country Risk Assessments Update: March 2020," March 20, 2020). We still anticipate that the economy will improve only gradually, so our economic forecast on Ukraine is broadly unchanged. As such, the domestic telecom sector is unlikely to see a material change in the factors that drive industry growth.

VF Ukraine 'B' issuer credit rating remains unaffected

Our base case on VF Ukraine remains broadly in line with the report published on Feb. 12, 2020, "Telecom Operator VF Ukraine Assigned 'B' Rating; Outlook Stable." Our stand-alone credit profile is based on VF Ukraine's status as the No. 2 provider of mobile telecommunication services in its domestic market, growing average revenue per unit (ARPU), high profitability, and strong free cash flow conversion. It is constrained by high country risk, regulatory and foreign exchange risk, and limited scale and diversification. Finally, the issuer credit rating on VF Ukraine is still capped by the 'B' transfer and convertibility (T&C) assessment on Ukraine, which shows our view of the likelihood that the Ukrainian government would restrict access to foreign exchange liquidity for Ukrainian companies. As VF Ukraine is a nonexport company and all of its revenue comes from Ukraine, we cap its rating at 'B'.
Our stable outlook indicates that we expect solid revenue growth, supported by price increases on the back of data monetization and gradually expanding adjusted EBITDA margins above 50% in 2020-2021 to lead to adjusted debt to EBITDA below 3x, FOCF to debt of about 10%, and an adequate liquidity position.
We could lower the rating if we lowered our sovereign rating or our T&C assessment on Ukraine. We could also lower the rating if the company's liquidity position deteriorates.

We could raise the rating if we raised our T&C assessment on Ukraine.
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