VEON LTD.
Fitch Ratings has affirmed
The Outlook is Stable.
VEON has limited leverage headroom for its rating but we expect it to remain committed to keeping its leverage below company-defined 2.4x net debt/EBITDA, which largely corresponds to Fitch's new downgrade threshold of 2.5x funds from operations (FFO) net leverage. We expect that in the medium term, deleveraging will be supported by growing revenue and EBITDA and gradually declining capex.
The sale of Algerian operations is unlikely to have a material impact on the leverage profile unless VEON uses a major part of the proceeds for shareholders remuneration. Its flexible dividend policy and cost-efficiency programmes will remain key to mitigating operational challenges.
KEY RATING DRIVERS
Limited Leverage Headroom: We expect VEON's FFO net leverage to be at 2.5x in 2021 and gradually decline from 2022, driven by revenue and EBITDA growth and modest post-dividend free cash flow (FCF) generation. Deleveraging will be supported by a flexible dividend policy targeting to pay out at least 50% of prior-year equity FCF (company definition) after spectrum payments as well as our expectation for capex to gradually decline after its acceleration in 2020-2021. VEON's leverage increased in 2020 due to a material impact of Covid-19 on operations and emerging-markets currency depreciation on EBITDA.
Algeria Sale Neutral: We believe that the sale of VEON's share in Algerian operator Djezzy will be largely neutral for the rating. At this stage we do not have visibility on the terms and the timing of the deal as well as on the usage of proceeds. However, we believe that VEON will remain committed to its leverage policy and use the proceeds to stay within its 2.4x net debt/EBITDA guidance. Fitch had previously deconsolidated Algerian operations but included dividends from it when calculating VEON's leverage. Once the sale of the subsidiary is completed we will switch to FFO net leverage and set the threshold for investment-grade rating at 2.5x.
Russian Market Improvements: VEON's Russian subsidiary demonstrated an improving revenue trend in 4Q20 and 1Q21 after pronounced pressure at the height of lockdowns in 9M20. We believe that VEON's accelerated investment to improve 4G coverage and an increased focus on customer-product quality and satisfaction should support its market positions in mobile in the medium term. Gradual removal of travel restrictions should support mobile revenues, subject to pandemic developments. Broadband and pay TV are likely to remain strong due to increase demand for data, reliable connectivity and entertainment during lockdowns.
Substantial FX Mismatch: Substantial FX risk leaves little headroom for additional leverage at the 'BBB-' rating. VEON faces a significant FX mismatch, with 55% of its gross debt in US dollars (after hedging) at end-1Q21, and all cash flows in local currencies. Long-term local debt or FX hedging instruments in other markets are either not widely available or are prohibitively expensive and further progress with matching local currency cash flows with local debt may be difficult, in our view.
Diversified Assets Portfolio: VEON's geographically diversified portfolio of operating assets provides some divestment flexibility without dramatically changing the company's operating profile in the long term. VEON has a balanced mix of mature markets (
Cost Cutting Supports Margins: VEON's ongoing efficiency improvement efforts should lead to at least a modest improvement in the EBITDA margin in the short-to-medium term, in our view. Our expectation is supported by a strong record of cost optimisation at VEON's headquarters in 2019-2020. The other important area is interest expense where VEON managed to reduce the average cost of debt to 5.9% in 1Q21 from 6.8% in 1Q20, saving around
DERIVATION SUMMARY
VEON benefits from established market positions across its operating footprint. It is the third-largest mobile operator in
Geographical diversification is of limited benefit because VEON operates in various countries with macro-economic and political risks, which have sub-investment-grade sovereign ratings. It faces a higher FX mismatch between debt and cash flow than its Russian peers, which makes its leverage more sensitive to exchange-rate volatility, leading to slightly tighter leverage rating sensitivities. VEON addresses emerging markets' cash-conversion risks with effective liquidity management.
VEON's ratings reflect the moderate impact of low-scored operating environments in all of the company's markets.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Flat to low single-digit organic revenue growth in
Low to mid-single-digit organic revenue growth in
Double-digit organic revenue growth in
Largely stable EBITDA margins in each region. Overall EBITDA margin (pre-IFRS 16) at around 37%-38% in 2022-2024, with annual improvements due to larger contribution of high-margin countries such as
Capex, excluding for spectrum, at around 23% of revenues in 2021, and declining to 21%by 2023
Annual dividends at 50%-75% of prior-year equity FCF in 2022-2024. No dividends in 2021
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A significant improvement in the macroeconomic operating environment in key emerging-market countries of operations, accompanied by sovereign rating upgrades, leading to sustainably more predictable FCF generation, coupled with maintained good corporate governance and a lower FX mismatch between cash flow and debt
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sustained rise in Fitch-defined net debt/EBITDA to above 2.2x, with Algerian operations deconsolidated but reflecting regular dividends from this subsidiary in EBITDA (without the sale of Algerian subsidiary).
FFO net leverage sustainably above 2.5x (after the sale of Algerian subsidiary)
Significant market share erosion and operating pressures leading to weaker cash flow generation
Hindrances to cash-flow circulation across key subsidiaries, most importantly, in
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: VEON's liquidity as of end-1Q21 was strong with
ISSUER PROFILE
VEON is a geographically diversified mobile-focused telecoms operator with operations in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
senior unsecured
LT BBB- Affirmed BBB-
VEON Ltd. LT IDR BBB- Affirmed BBB-
senior unsecured
LT BBB- Affirmed BBB-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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