Rinat Akhmetov
The largest fixed-line and internet operator, Ukrtelecom, owned by Rinat Akhmetov's SCM, is in a pre-default state.
An independent auditor expressed concerns that the company would not be able to repay all short-term loans on time in 2015.
The operator has found itself in a situation where its critically needed further increase in cash receipts depends on the will of the state.
Only the National Commission for State Regulation of Communications and Informatization will decide whether to raise communications rates in 2015, and only the Antimonopoly Committee of Ukraine will decide whether to approve the completion of the Trimob sale.
Debts on debts
PricewaterhouseCoopers, an audit firm, conducted an independent audit of Ukrtelecom's operations in 2014. Although the operator ended the period with a profit of UAH 286,2 million, the auditor concluded that the company's debt burden could be critical.
"There is significant uncertainty regarding events and circumstances that may cast doubt on the company's ability to continue as a going concern," the audit report said.
Experts from Priceworth House Coopers believe that the company's ability to negotiate a renegotiation of its debt is significantly impacted by economic and political uncertainty in Ukraine.
At the end of 2014, Ukrtelecom's current liabilities exceeded its current assets by UAH 1,5 billion. Most of these liabilities were short-term, due within a year. UAH 1,3 billion was due in the first quarter: UAH 821 million in loans and UAH 431 million in bonds.
"These circumstances may raise significant doubts about the company's ability to meet its obligations," the audit said.
The company's management believes it is taking all necessary measures to maintain the company's liquidity. Specifically, at the end of 2014, the operator had an unused credit line limit of UAH 500 million.
The report also notes that Ukrtelecom already used the limit in January and February to partially pay off its principal debts, and must now quickly repay it in April and September 2015.
The report notes that the operator managed to reach an agreement with some creditors to defer payments. Furthermore, on March 18, the maturity date of UAH 400 million worth of bonds was postponed to 2016.
According to PricewaterhouseCoopers experts, Ukrtelecom has not fully completed the negotiations and has not formalized a legal agreement to extend a portion of its debt for another year. The company acknowledged that its liquidity depends on its creditors' willingness to allow it to default on its debt in 2015.
Banks have nowhere to go
Concorde Capital analyst Oleksandr Parashchyi says the auditor's reference to Ukrtelecom's difficult debt situation was no accident. "Apparently, he believed that operating cash flows would not allow for debt repayment," he notes.
Artemy Yershov, a member of the PFTS Supervisory Board and financial expert, believes that Ukrtelecom's current debt of UAH 1,5 billion isn't fatal. He stated that if the company fails to pay its 2015 debt, creditors could default and sue the debtor.
However, in the current financial market situation, not every bank can take such measures, as institutions are experiencing difficulties in building up reserves.
"If one of the creditor banks decides to sue the debtor, they will have to stop charging interest and accrue 100% of the debt into reserves. Not every bank can afford this," says Yershov. After all, litigation at three levels of jurisdiction can drag on for a long time.
Parashchyi supports Yershov in this regard. He notes that Ukrainian banks and companies are in the same boat. Some are unable to increase reserves due to debtor defaults, while others are unable to repay their debts on time.
"Right now, demanding early loan repayment from almost any Ukrainian company is hopeless," says Parashchyi.
On the other hand, according to Yershov, Ukrtelecom may indeed be experiencing difficulties in attracting new long-term loans. However, he says, if short-term loans lasting several months for refinancing are involved, it would be better to borrow at 40%.
It's far worse to let the situation deteriorate to the point of default and ruin relationships with long-term partners. However, Paraschiy believes that Ukrtelecom, even with its current debts, remains a more or less reliable potential borrower for banks. After all, it's not ceasing operations.
Why will the NKRSI and AMCU save?
Ukrtelecom began 2015 without any Crimean assets. Two more branches—in Donetsk and Luhansk—are located in the war zone. By the end of 2014, they accounted for approximately 11% of all accounts receivable, as not all clients there were able to pay their bills.
Combined with the financial burden of debt, these circumstances led to Ukrtelecom ending the first quarter with a loss of UAH 165 million.
Nevertheless, the company has recently managed to significantly reduce operating expenses. In the first quarter, the cost of services provided decreased by UAH 217,7 million to UAH 956,6 million compared to the same period in 2014. This may be due to a reduction in personnel costs.
Labor and social expenses in the first quarter of 2015 decreased by UAH 130 million, and the number of employees over the past year alone decreased by 16,3 thousand to 38 thousand.
This expense item is the company's primary cost structure. Parashchyi adds that in May 2014, Ukrtelecom "gave itself free rein" in this area. For three years, following the company's privatization in May 2011, a moratorium on owner-initiated staff reductions was in effect.
The company's revenue in 2015 could also increase significantly. A PricewaterhouseCoopers report notes that the company intends to raise additional funds from the sale of its 3G operator, Trimob. SCM has agreed to sell this company to the Turkish holding company, Turkcell.
According to the report, the deal will close in the third quarter after approval by the Antimonopoly Committee of Ukraine. This means the company will receive another source of debt financing.
How quickly Ukrtelecom can recover from its debt on its own depends on whether the National Commission for the State Regulation of Communications and Informatization (NKRZI) decides to raise local call tariff caps again. This has happened in previous years. The increased tariffs even offset a significant subscriber churn.
In 2014 alone, the number of telephone lines served by the company decreased by 730 to 8 million. The loss of Crimea and the emigration of the population in Donbas significantly impacted the outflow.
Although Ukrtelecom is the largest operator in the internet access market, controlling approximately a quarter of it, this segment does not yet allow the company to fully compensate for losses from other types of communications.
In 2014, internet revenue increased by only UAH 61 million to UAH 1,215 billion. To increase revenue from this segment, the company was forced to raise internet package rates by an average of UAH 10 in April 2015. These rates, unlike local phone rates, are not regulated by the state.
However, Ukrtelecom also cannot constantly raise internet fees—in this market, unlike fixed-line telephony, it is not a monopolist.
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