OREANDA-NEWS. Fitch Ratings has affirmed Sistema Joint Stock Financial Corp.'s (Sistema) Long-Term Issuer Default Rating (IDR) at 'BB-' and removed all ratings from Rating Watch Negative (RWN). The Outlook on the IDR is Stable. A full list of rating actions is at the end of this release.

Sistema is a diversified holding company with its key asset a controlling stake in OJSC Mobile TeleSystems (MTS; BB+/Stable), a large telecoms operator in Russia and CIS. Sistema's credit profile is primarily shaped by its ability to control cash flows and upstream dividends from MTS. This is overlaid by a significant debt burden at the holdco level including exposure to substantial off-balance-sheet liabilities related to its subsidiaries.

KEY RATING DRIVERS
End Of Bashneft Litigation
The RWN has been removed as we believe that Sistema is no longer at risk from any litigation against it in connection to Bashneft, its oil and gas subsidiary that was handed back to the state in line with a court decision. This is likely to draw a line under its losses in relation to the Bashneft seizure.

After the Russian court ruled that Sistema-controlled oil and gas subsidiary Bashneft was privatised improperly and had to be returned to the state, the company decided not to appeal this decision. In a separate case initiated by Sistema, the company was viewed as a bona fide buyer of this stake and was able to sue the seller of this stake for damages. Sistema's status of a bona fide buyer suggests that any further claims against it are unlikely, including for returning dividends received from Bashneft.

Although the litigation against the company's chairman has not been dropped, he was released from home arrest. An on-going investigation against him is not directly connected to Sistema.

Loss of Bashneft is Contained
The loss of Bashneft had only a limited negative impact on Sistema's credit profile. The company has been able to compensate for the loss of dividends by removing Bashneft's debt from the group balance sheet, reducing its off-balance liabilities and by implementing cost-cutting measures. Overall, the ownership of Bashneft was accretive for Sistema - the company received around RUB190bn of dividends from this subsidiary in 2009-2014 compared with paying approximately RUB84bn for this asset.

Reliable Dividend Flow From MTS
We expect MTS's operating and financial performance to remain strong in the downturn supporting its ability to pay large dividends. Sistema can effectively control the cash flows of MTS and shape its dividend policy. MTS's leverage is moderate, estimated by Fitch at 1.3x net debt/EBITDA and 1.9x FFO adjusted net leverage without the potential positive impact of hedging and assuming RUB21bn of restricted cash at end-2014.

MTS can potentially increase its leverage to up to 3x FFO adjusted net leverage without jeopardising its rating. Such an increase could release up to RUB170bn for dividends, which would be sufficient to address any debt repayment issues at Sistema.

More Cautious Strategy
We understand Sistema is likely to become more disciplined with acquisitions, leading to lower M&A risks. The focus of its strategy would likely change from asset diversification to cost cutting and debt management, at least in the medium term. In line with its earlier announced approach, the holdco does not have much appetite for providing support to its weak subsidiaries and they are expected to become fully self-funded.

Shyam Remains a Cash Burner
Sistema Shyam TeleServices (Shyam), Sistema's Indian loss-making Indian subsidiary, continues to depend on parental funding. However, it is pursuing a much less ambitious operating strategy primarily targeting a niche data market, and is likely to substantially reduce its negative EBITDA generation over the next two years. Sistema is likely to reduce its funding to a minimum level that would only be sufficient to keep this subsidiary afloat and not to compromise its valuations.

Lower But Sizeable Off-Balance Sheet Liabilities
We expect that Sistema will be able to reduce its off-balance liabilities, primarily by turning its technology subsidiary RTI into a sustainably self-funded business and repaying its Sistema-guaranteed legacy debt. The holdco's exposure to Shyam will take longer to resolve and will continue to weigh on the company's creditworthiness.

Sistema guarantees virtually all of Shyam's debt, which was reported at USD595m at end-3Q14. In addition, the Russian government may exercise its put option on an equity stake in Shyam against Sistema. We estimate the value of this put, which becomes exercisable from March 2016, at USD 777m.

Sufficient Short-Term Liquidity
Sistema has sufficient liquidity to cover its debt maturities in the form of a substantial cash cushion of USD1,139m reported at end-3Q14 and available untapped facilities from large domestic banks. We believe that Sistema will likely have to explore additional funding options if the government decides to exercise its Shyam put option in 2016.

Key Assumptions:
- Stable dividends from MTS in the range of RUB40bn-RUB50bn per annum.
- Modest dividends from other subsidiaries.
- No significant acquisitions or divestments.
- Rising interest payments as legacy cheaper debt is replaced with currently more expensive facilities.
- No new off-balance sheet liabilities.
- No new financial support for subsidiaries other than for Shyam.
- Gradually declining EBITDA losses at Shyam.


RATING SENSITIVITIES
A reduction in off-balance-sheet liabilities and sustained deleveraging at the holdco level to below 2.5x net debt including off-balance-sheet liabilities to normalised dividends may be positive for Sistema's rating. This is likely to be achieved through limiting Sistema's exposure to further losses and debt increases at Shyam and re-organisation of the technology segment so that it becomes capable of sustainably servicing its debt without parental support.

A protracted rise in this metric to above 4.5x may lead to negative rating action. A portfolio reshuffle increasing the share of subsidiaries with low credit profiles could also be rating negative.