Vodafone Ukraine (-/B/B): Thoughts on new eurobonds issue

Vodafone Ukraine (-/B/B), until recently MTS' subsidiary in Ukraine (in December 100% sold to Bakcell Group of Azerbaijan), is holding a road-show of its debut dollar-denominated eurobonds. The notes are expected to mature in five years. The pricing of the deal has not been disclosed yet. The book is expected to be opened early next week, starting February 3. Proceeds will be used to refinance a bridge-loan taken by a new owner to buy a stake from MTS ($484 mln).

Estimated pricing. Vodafone Ukraine's composite rating is at the same level as the sovereign one. However, the company's bonds should fairly offer a premium to the government curve, assuming debut offering and higher credit risks. We also consider other ukrainian corporate bonds like Metinvest (Metinvest 26 YTM 6.58%) and Naftogaz (Naftogaz 26 YTM 6.38%) that are trading on the comparable time horizon. In our view the spread between Vodafone and Metinvest should be about 50 bps, given the difference in business size and  credit ratings. Therefore, we estimate that the low end of Vodafone's debut eurobonds fair yield range stands at 7%. The curve of global telecom issuers with a single-B rating for 5Y duration is at the same level.

Short company overview. Vodafone is the second-largest mobile operator in Ukraine by subscriber base with a 37% market share. The company was founded in 1992 and adopted the Vodafone brand in 2015 after striking a strategic agreement with Vodafone Group (valid until 2025). Since late 2019, the ultimate beneficiary of the operator is NEQSOL, representing Azerbaijan's largest TV operator Bakcell, owned by Nasib Hasanov. Since 2018, the company has been developing its own retail network, which currently has 617 stores (accounting for 5% of the revenue).

Vodafone's 9M19 revenue was $462 mln (+23% yoy). The stable OIBDA margin was as high as 53% as of the beginning of October 2019. The company's leverage seemed to be at a very low level before ownership changes. The 9M19 net debt/OIBDA ratio was estimated at 0.2x. Lease agreements accounted for the bulk of liabilities. The total debt in January-September 2019 dropped by about half, to $138 mln. NEQSOL raised a $484 mln bridge loan to finance a 100% share acquisition in December 2019. Therefore, the leverage increased to 1.7x (net debt/EBITDA). Covenants on the debut Eurobond issue limit Vodafone Ukraine's net leverage at 2.5x.

Among the key factors supporting the credit profile, we underscore stable credit metrics, which are confirmed (and at the same time limited) by the sovereign-level credit rating, strong market positions, high brand recognition, increasing cellular penetration in Ukraine and low cyclicality of the telecom sector. Among the main risks, we highlight small size of the company compared to its foreign peers, uncertainty of further development strategy due to recent ownership changes, macroeconomic headwinds and political risks in Ukraine.

Key financials

Source: Company data, ITI Capital

Telecom sector bond map

Source: Bloomberg, ITI Capital