Vodafone Ukraine, the second-largest mobile operator in Ukraine, is looking to issue debut bonds. According to Bloomberg, the new 5-year callable (5NC2) deal is expected to be of benchmark, cUS$500mn, size. We compare the new bonds to the Ukrainian corporate universe and to telecommunications names in Turkey and Russia, and conclude that the Vodafone Ukraine z-spread could be 180-250bps over the sovereign. If the deal were priced today, it could be issued with a yield to maturity of 6.8%-7.5%.
Vodafone Ukraine vs. Ukraine corporates. Vodafone Ukraine is expected to be rated B by S&P and Fitch in line with the prevailing single-B ratings of Ukrainian corporates. The company offers non-cyclical exposure to Ukraine, has high profitability and moderate pro-forma leverage after refinancing. Given its private ownership and FX risks (see below), it seems logical that the new bonds should be priced at a premium to the sovereign, quasi-sovereigns (RAILUA, NAFTO) and most of the corporates with established yield curves, all of which rank better on FX mismatch due to a high proportion of export revenues, have moderate leverage and a proven history of investor-friendly disclosure standards (MPHSA, KERPW, METINV). Taking METINV z-spread as a starting point, we adjust it for duration and add a 50bps premium to justify buying the new issue vs adding METINV. This places the minimum z-spread at 540bps or c180bps over interpolated sovereign benchmark.
Vodafone Ukraine vs. regional peers. A lack of industry peers in Ukraine makes us turn to the neighbouring markets for spread guidance. There are established yield curves of telecommunications companies in Russia and Turkey. In Russia, MOBTEL and VIP trade at 60-70bps or at a ratio of 1.7-1.8x to the sovereign curve. In Turkey, TCELLT and TURKTI are roughly flat to the sovereign. Turkish and Russian telcos are bigger, publicly listed companies with lower or comparable leverage, partially hedged FX exposure, a long track-record in the bond market and higher credit ratings. We think that “flat to sovereign” is a highly unlikely outcome in Ukraine, where most corporate bonds pay a premium over the sovereign curve. Applying spread ratios of Russian telcos to Ukrainian sovereign benchmark would place the new issue at 250-285bps over the sovereign.
What is Vodafone Ukraine? The company is the second largest mobile operator in the country with c20mn subscribers and c36% market share in Q3 19. Vodafone is not a shareholder in the company. Until December 2019, Vodafone Ukraine was indirectly owned by MTS, a leading telecommunications company in Russia. Last year, MTS sold its entire 100% stake in the Ukrainian operator to Bakcell, an Azeri mobile operator, for US$734mn. According to Interfax-Ukraine, the buyer partially funded the acquisition with bridge loans, which we understand will be refinanced with proceeds from the debut bonds placement.
New debt to introduce leverage and increase FX risk. In 9M 19, Vodafone Ukraine reported US$436mn in revenues and generated US$230mn in EBITDA corresponding to an EBITDA margin of 53%. The company had an insignificant amount of debt before the change of ownership. As mentioned above, the acquisition was financed by bridge loans, which the bonds aim to refinance. Adding cUS$500mn of debt to the company’s balance sheet would increase its debt-to-EBITDA ratio to c2x. Vodafone Ukraine generates most of its revenues in the local currency, but a big chunk of capex and most of its debt are in hard currency, which subjects the company to an elevated FX risk. Unlike its Russian and Turkish peers, Vodafone Ukraine does not hedge its hard currency exposure.
Little is known about the new shareholders. The new shareholder Bakcell and its holding company NEQSOL Holding, is controlled by Nasib Hasanov. According to NEQSOL’s website, the holding company has assets in telecommunications (Bakcell, Vodafone Ukraine), energy (Nobel Oil, Nobel Upstream) and construction (Norm) sectors. The holdco’s financial statements are not available, but according to an S&P report (link here – free for registered users), the holdco has high profitability and leverage metrics better than those of its new Ukrainian subsidiary. NEQSOL has experience in the telecom industry, but unlike the previous owner New York-listed MTS, is less transparent.