MTS May Borros as It Grows Amid Crisis, CFO Kornya Says

OAO Mobile TeleSystems, Russia’s biggest mobile operator, may borrow this year as it seeks to expand in countries such as Ukraine amid the worst economic crisis since 2009, Chief Financial Officer Alexey Kornya said.

The company, which has about $1 billion in cash, expects to borrow about $500 million by end of 2015 and may tap debt markets as soon as this quarter, Kornya said in an interview at Bloomberg headquarters in New York. MTS, which is not directly targeted by international financial restrictions imposed on Russia linked to the Ukraine conflict, still has access to overseas credit markets and may borrow in dollars and rubles, he said.

MTS, controlled by billionaire Vladimir Evtushenkov, in February agreed to pay $116 million for a license to operate a high-speed 3G wireless network in Ukraine, which the company plans to build within about three years, Kornya said. Net debt was $3.8 billion at the end of 2014, the lowest level in seven years, according to data compiled by Bloomberg, as a plunge in oil, Russia’s biggest export, drove a 46 percent decline in the local currency. About three-quarters of the debt is denominated in rubles, according to Kornya.

“A lot will depend on oil prices, but the biggest challenge seems to be over,” he said. “We just won a 3G license in Ukraine, we paid a lot and that is because we are interested in the market, we see a potential there longer term.”

Sales Growth

MTS borrowed 25 billion rubles ($455 million) from OAO Sberbank in the first quarter, which was the remaining amount of a 50 billion rubles lending facility, Nikolai Minashin, investor relations officer at MTS, said in a separate interview on Tuesday.

The company is “very comfortable” with the current debt level, Kornya said. There is no final estimate on how much the 3G network in Ukraine would cost MTS to roll out, he said.

MTS, which gets 90 percent of its revenue from Russia and less than 10 percent from Ukraine, expects to grow at “mid-single digits” in rubles in 2015, Kornya said. The Russian economy, which is being squeezed by U.S. and European sanctions over Ukraine and a decline in oil prices, is teetering on the brink of its first recession in six years and is expected to decline 3 percent, according to a government forecast.

The company said last month that sales this year may rise 2 percent or more compared with 3.1 percent growth in 2014. Operating income before depreciation and amortization will be more than 40 percent of sales, compared with 43 percent in 2014, the company said in a statement.

‘Attractive Market’

“Russia is still a very attractive market,” Kornya said. “It is still undervalued and that reflects a lack of understanding of Russia by investors.”

The American depositary receipts of MTS rose 2.1 percent to $10.87, extending its advance this year to 51 percent. A Bloomberg index of the most-traded Russian stocks in the U.S. rose 1.6 percent to a four-month high in New York on Tuesday.

MTS will stick to its policy of spending at least three-quarters of its free cash flow on dividend payments, Kornya said. The company may also subsidize smartphones that are traditionally fully pre-paid in Russia, he said. Smartphone penetration in Russia is expected to double to about 60 percent in the next two to three years, he said. That compares with 42 percent on the MTS network where usage will increase faster than in the overall market, he said.

Growth in MTS’s Russian data-traffic revenue, its main growth driver recently, slowed to 27 percent last quarter from 37 percent in the third quarter, according to a statement last month.

“There is no silver bullet in the mobile telecom market,” Kornya said. “But a lot will depend on how affordable smartphones are. It is way more challenging for customers to buy a smartphone after the ruble devaluation.”

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