December 19, 2017 / 1:12 PM / a year ago

Fitch: Large Litigation Payment Weakens Sistema's Credit Profile

(The following statement was released by the rating agency) MOSCOW, December 19 (Fitch) Fitch Ratings says that Sistema Public Joint Stock Financial Corporation's 'BB-' ratings, which are on Ratings Watch Negative (RWN), may be downgraded following the arbitrage court's decision that Sistema must pay RUB136 billion of damages to two Russian oil companies. The payment would lead to a spike in leverage at holding company level significantly above the downgrade threshold. Sistema intends to satisfy the claims in full in line with the court's requirement while at the same time appealing the decision in the court of cassation. The latter may freeze the payment order, in which case the rating action would be pending a final resolution of the case. Sistema lost its appeal against the arbitrage court's judgement that it must pay Russian oil companies Rosneft and Bashneft RUB136 billion in relation to damages allegedly suffered by Bashneft as a result of its reorganisation in 2014. The amount of settlement is high compared to total debt at holding company level of RUB149.1 billion at end-3Q17. The increase in debt would drive leverage significantly above Fitch's downgrade threshold of 4.5x net debt including off-balance-sheet liabilities to normalised dividends (from 3.4x in 2016) and lead to a negative rating action. Fitch aims to take a decision on the ratings once the agency has more clarity on how Sistema aims to satisfy the claim and manage its capital structure in the medium term. Sistema's credit profile is primarily shaped by the company's ability to control cash flows and upstream dividends from PJSC Mobile Telesystems (MTS; BB+/RWN) and other subsidiaries. The outcome for the ratings therefore depends on the company's plan for leverage reduction, which is likely to include a disposal of certain assets, in our view. A downgrade of Sistema's ratings would be likely to have a negative impact on MTS' ratings. Under Fitch's methodology, a subsidiary can generally be rated a maximum of two notches above its parent in the presence of weak parent/subsidiary links. Further negative rating pressure for Sistema and MTS may come from another lawsuit for RUB132 billion brought by Rosneft and Bashneft against Sistema. The oil companies are demanding compensation for dividends that Bashneft paid to Sistema in 2009-2013. Fitch placed Sistema's ratings on RWN on 28 June 2017 following a Russian court injunction to freeze significant Sistema assets, including its 31.76% stake in MTS, in relation to claims filed by Rosneft against Sistema. Contact: Slava Bunkov Director +7 495 956 9931 Fitch Ratings CIS Ltd 26, Valovaya Street Moscow 115054. Irina Andrievskaya Associate Director +44 20 3530 1715 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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