S&P Negative on Russia's STC

MOSCOW -- Standard & Poor's Ratings Services said today it revised its outlook on Russia-based telecommunications operator Southern Telecommunications Co. (OJSC) (STC) to negative from stable, reflecting the company's expected significantly higher negative free operating cash flow and higher gearing in 2003.

At the same time, Standard & Poor's affirmed its 'B-' long-term corporate credit rating on STC but lowered its long-term Russia national scale and senior unsecured debt ratings on the company to 'ruBBB-' from 'ruBBB'. In addition, Standard & Poor's assigned its 'ruBBB-' senior unsecured debt rating to STC's proposed Russian ruble (RUR) 1.5 billion ($52.5 million) senior unsecured bond issue.

"The increase in STC's negative free operating cash flow and gearing is anticipated to be more than originally expected by Standard & Poor's and the trend is set to continue in 2004," said Standard & Poor's credit analyst Pavel Kochanov.

STC has carried out aggressive investments in an effort to increase sales from traditional telephony and unregulated new services, but Standard & Poor's believes that the effect on revenue and profitability growth over the next few years is still uncertain at this stage. Demand for new valued-added services--from which the company expects to derive substantial additional revenues--could increase at only a modest pace, while additional revenues from new fixed-line subscribers could be marginal.

The company's total debt was RUR8.44 billion at Sept. 30, 2003, (under Russian Accounting Standards) and Standard & Poor's expects this to have increased to about RUR12 billion at Dec. 31, 2003--possibly yielding a ratio of total-debt-to-EBITDA in excess of 2.5x.

"STC's aggressive financial policy should continue to result in higher debt and significant negative free operating cash flow over the short term," added Mr. Kochanov. "The ability of the company to raise revenues and profit margins on back of its heavy investments, while maintaining sufficient liquidity, will be key ratings factors over the next year."

Standard & Poor’s