"The industry is entering 2010 in good shape, having already sorted out many liquidity, refinancing and FX issues which arose during the financial crisis. This positive trend is likely to continue," says Artem Frolov, Associate Director in Fitch’s TMT team in Moscow.

In a report published today, Fitch says revenues are likely to continue increasing, driven mostly by broadband expansion and supported by voice tariffs indexation. EBITDA margins, which reached historical highs in 2009 due to substantial anti-crisis cost-cutting, however, are likely to come under modest pressure in 2010, as companies may slow down their cost-cutting drive and mobile operators are likely to expand into the lower-margin handset retail business.

Fitch expects the fixed-line telecoms market to consolidate in 2010-2011 due to the pending reorganisation of the Russian state telecoms holding company, Svyazinvest. Small and medium-sized regional broadband providers and few independent regional mobile operators will likely be the main acquisition targets. The mobile segment will see the rise of new large players, such as a consolidated operator controlled by Svyazinvest, and Tele2 gradually closing the gap with larger peers.

In Fitch’s view, the planned merger of Svyazinvest’s regional incumbent subsidiaries with Rostelecom will yield a stronger credit profile for the combined operator than the separate entities have now. Fitch believes that regulation, which is currently favourable for large players, is unlikely to change materially in 2010, which should help support the development of the new Svyazinvest-controlled operator.

While in 2009 most companies managed to reduce leverage on the back of lower capex and reduced new borrowings, there is a possibility that this trend may reverse as the credit environment improves and large players may become more aggressive in their infrastructure investment and M&A activities. Nevertheless, Fitch believes that most of its rated telecoms companies have reasonable headroom for leverage increase, although substantial increase of short-term debt and, consequently, rising refinancing risks would be considered credit- negative.

Rated Russian/CIS telecoms issuers are OAO MegaFon (‘BB+’/Positive), OJSC Mobile TeleSystems (‘BB+’/Stable), Kazakhtelecom JSC (‘BB’/Stable), Sistema Joint Stock Financial Corp. (‘BB-’/Stable), OJSC VolgaTelecom (‘BB-’/Stable), OAO North-West Telecom (‘BB-’/Stable), OJSC Far East Telecom (‘BB-’/Stable), OAO Uralsvyazinform (‘B+’/Stable), OAO Sibirtelecom (‘B+’/Stable), OAO Centertelecom (‘B+’/Stable), OJSC Tattelecom (‘B+’/Stable) and JSC Transtelecom Company (‘B+’/Stable).