21 Dec 2009 15:57

S&P assigns Sistema bonds '4' Recovery Rating

MOSCOW. Dec 21 (Interfax) - Standard & Poor's Ratings Services has assigned a recovery rating of '4' to the Russian ruble (RUR) unsecured bonds (RUR20 billion due 2014, RUR6 billion due 2013 and RUR19 billion due 2016) issued by Russian holding company Sistema (Sistema; BB/Negative/--), the agency said in a press release.

The '4' recovery rating indicates S&P's expectation of average (30%-50%) recovery in the event of a payment default. The issue-level ratings on these unsecured debt instruments remains 'BB', in line with the 'BB' corporate credit rating on Sistema.

The issue rating on the $350 million bonds due 2011 issued by Sistema Capital S.A., and guaranteed by Sistema is 'BB', in line with the corporate credit rating on the parent company, Sistema. The recovery rating on these notes is '4', indicating S&P's expectation of average (30%-50%) recovery in the event of a payment default.

S&P has valued the company based on the stressed value of its asset portfolio. Given Sistema's valuable and diversified assets, with exposure to various companies with leading market positions; established network assets; and valuable customer base in Russia's telecoms and oil businesses, S&P believes that a default would most likely be triggered by a significant reduction of dividends upstream, as a result of operating underperformance--mainly in the telecoms business. S&P also sees a risk that possible debt-funded acquisitions at the Sistema level could exacerbate these risks. As part of our analysis, S&P has assumed that the secured debt at the holding company level will be refinanced with unsecured debt instruments at operating companies.

The issue-level and recovery ratings on the unsecured debt take into account the nature of Sistema' assets and the likelihood of insolvency proceedings being adversely influenced by Sistema's being domiciled in Russia.

The recovery ratings on the notes are based on the current capital structure (unsecured debt instruments raised at the holding company level), which, given the weak documentary protections (in particular against raising new debt), could change materially on the path to default. Any change in the group's financial policy and capital structure--such as additional debt raised with parity or priority to these unsecured debt instruments--could significantly affect our hypothetical default scenario and waterfall analysis, and thereby impair recovery prospects for the bonds.