SSTL is preparing bonds for $230 million

Russian-Indian cellular operator Sistema Shyam Teleservices (SSTL) plans to issue non-convertible bonds worth $230 million, which will be offered to third-party investors. The company needs money for development, and shareholders, including AFK Sistema and the Federal Property Management Agency, may not be interested in financing SSTL, analysts say.

SSTL (MTS India brand) announced an absentee vote of shareholders on the issue of non-convertible bonds in the amount of $230 million. “This is an alternative financing instrument that can be used mainly to repay external debt,” a representative of AFK Sistema, the main shareholder, told Kommersant SSTL. The size and timing of the placement will vary based on the operational needs of SSTL.

SSTL provides CDMA communication services under the MTS brand in nine districts of India. SSTL shareholders are AFK Sistema - 56.68%, Indian Shyam Group - 24%, another 7.14% - from the Federal Property Management Agency, 2.18% - from minority shareholders. In the third quarter of 2014, SSTL increased revenue by 26.6%, to $56.5 million, net loss decreased by 41%, to $32.6 million. SSTL’s external debt amounted to $595 million.

“Not only existing shareholders will be able to buy back the bonds. Third-party borrowers are showing interest in the company, and therefore the securities will also be offered to investors on the open market,” said SSTL CFO Sergei Savchenko. The maturity dates and interest on the bonds, he said, have not yet been determined. AFK Sistema did not say whether they were going to buy back SSTL bonds. The company has already invested about $3.5 billion in its Indian subsidiary in recent years, of which $1.6 billion was for the purchase of 9.43 million preferred shares. AFK Sistema bought them to provide financial support to SSTL without increasing the voting share above the 74% threshold (established by Indian legislation on foreign capital restrictions). This obstacle was lifted in August 2013, but India's Foreign Investment Promotion Board (FIPB) has yet to allow SSTL to increase its foreign share through conversion of preference shares.

“In addition to paying off short-term debt, funds can be invested in improving the quality of the network, attracting new subscribers, marketing activity and other operational needs,” says Sergei Savchenko. In 2012, by decision of the Indian authorities, SSTL almost lost almost all its licenses, but in March 2013, as part of a new auction, it returned the rights in eight states. In February 2015, a new competition was announced for frequencies for the CDMA (800 MHz) and GSM (900 MHz and 1800 MHz) networks, but SSTL was not satisfied with the price.

SSTL may also need funds to deploy LTE networks. In December 2014, SSTL General Director Dmitry Shukov told Kommersant that “at an acceptable cost of the frequency spectrum” in 2016, the company will develop a program for transition to LTE, and then begin deploying the network in the most promising districts - Tamil Nadu, Rajasthan and Delhi. In 2013, AFK Sistema estimated this project at $200 million.

“SSTL may reach break-even as early as 2015, and also plans to begin developing LTE networks, so demand for bonds on the market is possible. In this case, AFK Sistema is unlikely to take part in the redemption of securities; it will prefer third-party borrowers,”— says Gazprombank analyst Sergei Vasin. Konstantin Belov from Uralsib Capital generally believes that “Sistema is not interested in investing in SSTL.” There’s no point in expecting investments from the Federal Property Management Agency for SSTL either (the department did not respond to the request), a Kommersant source close to the company told Kommersant, the state already made a concession by converting India’s national debt into shares of the operator.

Maria Kolomychenko

With a sense of Indian duty