It was reported on September 25 that the Vimpelcom phone company, which had until recently planned to take a USD one-billion three-year syndicated loan, has now opted to reduce the amount to EUR 500-600 million, or USD 730-880 million. The interest rate on the loan has also altered. It now stands at EURIBOR + 230 basis points, against the previous LIBOR + 180 basis points.
After taking over GoldenTelecom, Vimpelcom, the second largest phone operator within the former USSR, has seen its leverage rise significantly. Given the credit squeeze and higher borrowing costs, this cannot but negatively affect Vimpelcom. However, we do not believe that the current situation is critical, given that the company has high profit margins and, therefore, is unlikely to encounter any problems in debt servicing.
For MTS, the issue of borrowing costs is of secondary importance, as the company has low leverage, as compared with Vimpelcom’s (1.35x OIBDA for 1H 2008, versus 2.6x OIBDA). Due to this fact, borrowing costs for MTS should be lower than those for Vimpelcom.
We currently do not have an official recommendation on Vimpelcom shares. As for MTS, our recommendation is to BUY this company’s common shares, with a target price for the shares of USD 15.34.
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