Fitch: Data law to hike telecom leverage, clients not to bear charge

MOSCOW, Nov 29 (PRIME) -- The continuing uncertainty over the implementation of the data retention law increases the risk that many Russian telecoms may face significant one-off investments leading to a leverage spike in 2018, rating agency Fitch said on Wednesday in a statement.

“In our view it is unlikely that the law-related costs will be fully passed on to customers, thus spelling negative implications for the industry’s profitability and cash flow generation,” the agency said.

In force from July 1, 2018, the data retention law, also known as Yarovaya law after Deputy Irina Yarovaya, who actively pushed forward the initiative obliging telecom operators and Internet providers to store customer traffic. The government is yet to decide on types and terms of data storage.

“Technical requirements may be demanding. Huge traffic volumes would require new storage capacity on an unprecedented scale. In the worst case scenario of storing most of customer traffic, operators would also need to nearly double their port capacity as any data stream to an individual customer would also have to be simultaneously sent to a storage facility,” Fitch said.

“The potential financial impact of the new legislature may be significant. In October 2017 the regulator estimated the likely initial one-off investment at tens of billions of rubles per operator, with the overall investment not to exceed 100 billion rubles per operator over a three-year period. Operators with high traffic volumes such as fixed-line broadband providers, like Rostelecom, would face higher investment requirements than mobile-only providers, like T2 RTK Holding.”

The rating implications will depend on the amount and timing of incremental investments, leverage level and expected deleveraging capacity. “We expect that Rostelecom’s ratings should be able to withstand a spike in leverage, based on our scenario analysis. With the company’s EBITDA at slightly less than 100 billion rubles, the Yarovaya law-related one-off costs of also below 100 billion rubles are equivalent to 1x additional leverage. With Rostelecom’s funds from operations adjusted net leverage forecast by Fitch to end-2017 at 2.3x, an additional 1x would still keep leverage below our 3.5x downgrade threshold,” the agency said.

The rating impact may be more negative for operators with lower leverage headroom such as VEON, the sole owner of mobile operator VimpelCom, and T2 RTK Holding. “Generally, we expect the impact to be more significant for smaller operators such as Tattelecom and TransTeleCom, as they may find it more challenging to comply with the technical requirements at a reasonable cost,” Fitch said.

“We believe operators will not be able to fully pass on incremental costs to subscribers. The Russian telecoms market is mature and competition is intense. Abrupt price increases are unlikely to be well received by customers and could lead to substantial market share changes.

“We continue to treat the potential impact of Yarovaya law as an event risk as the legislation requirements may change and/or its implementation delayed. Historically, the industry has been able to reach amicable compromises with the authorities. However, with less than eight months to the date when the law comes into effect and no clear implementation parameters set by the regulator, we see the cliff risk as significant and potentially onerous.”

(58.4125 rubles – U.S. $1)

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