Fitch Ratings has assigned PJSC VF Ukraine, the second largest mobile operator in Ukraine, a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B', the outlook on the IDR is positive, Fitch has said on its website.

"Fitch has also assigned VFU Funding plc's (VFU Funding) proposed loan participation notes (LPNs) an expected rating of 'B (EXP')' RR4'/50%," the report says.

"The ratings of VF Ukraine are constrained by Ukraine's Country Ceiling of 'B'. Its credit profile benefits from its solid market position, ownership of the company's backbone infrastructure, high profitability and a moderately competitive environment. This is counterbalanced by the lack of product and geographical diversification, high FX risks and further significant capex needs for 4G roll-out over the next few years," Fitch experts stated.

"The positive outlook corresponds to that of the sovereign rating, assuming that the Country Ceiling will move in line with a potential upgrade of Ukraine's rating," they said.

"VF Ukraine is the second-largest mobile operator in Ukraine. With 19.8 million subscribers at end-3Q19 it held around a 35% market share in mobile, which has remained broadly stable over the last five years. In 2018, it completed its rebranding process and currently operates under the Vodafone brand. Vodafone Group Plc (BBB/Stable) is not a shareholder in VF Ukraine," according to the document.

"Ukraine is effectively in a three-player mobile market, with the two largest operators accounting for a combined 80% share of the total mobile market. In 2019, mobile revenues of the three largest operators continued to grow in mid-teens, driven by an increase in data consumption following the roll-out of 4G networks in 2018. Competition is likely to remain moderate in the medium-term given the growth opportunities in average revenue per user (ARPU) from gradual migration of subscribers to 4G from 2G and 3G," the report reads.

"VF Ukraine is exposed to significant FX risks. Its revenue is mostly in Ukrainian hryvnia, while about 80% of its capex, 20% of its operating expenses and the expected LPNs are denominated in U.S. dollar. VF Ukraine does not currently hedge its FX risks due to the high price of financial hedging instruments. This FX mismatch results in tighter leverage thresholds for any given rating level than for its Russian and European peers," it says.

"VF Ukraine's strong operating cash flow generation is supported by high profitability. EBITDA margin, excluding the impact of IFRS 16, was 45% in 2018. We expect EBITDA margin to decline to around 41% in 2020-2022, affected by loss of revenue and EBITDA from the conflict-stricken eastern part of the country and some pressure from retail sales," the expert said.

"The launch of 3G in 2015 and 4G in 2018 resulted in considerable capex, with cash capex, excluding spectrum costs, ranging from 29% to 41% of revenue in 2016-2018. This led to annual negative free cash flow (FCF) of 5%-7% of revenue during that period. VF Ukraine is planning to achieve 90% LTE population coverage by 2022, which will require continued significant network investments in 2019-2021. Fitch expects cash capex to remain fairly high at around 26% of revenue in 2019-2020, before easing to 22% in 2021 and 20% in 2022," it said.