Fitch Downgrades Wind to 'B+'; Rates Proposed Notes 'BB-(EXP)'/ 'RR2(EXP)'

Tue Jun 24, 2014 9:32am EDT

(The following statement was released by the rating agency) MOSCOW/LONDON, June 24 (Fitch) Fitch Ratings downgraded Wind Telecomunicazioni S.p.A's (Wind) Issuer Default Rating (IDR) to 'B+' from 'BB-' and assigned a Stable Outlook. Wind's instrument ratings were also downgraded by one notch. A full list of rating actions is provided at the end of this commentary. At the same time Fitch has assigned expected 'BB-(EXP)'/'RR2(EXP)' ratings to Wind's proposed EUR500m floating-rate notes due 2020 and EUR3,565m equivalent senior secured notes due 2020. The notes are to be issued by Wind Acquisition Finance S.A and guaranteed by Wind. The assignment of the final ratings is contingent on the receipt of final documents materially conforming to information already reviewed. The proposed instruments will effectively be senior secured obligations of Wind, benefiting from largely the same security package and covenants as Wind's other secured debt. The new issue proceeds will be used to refinance part of the outstanding secured debt. As the amount of secured and unsecured debt is likely to remain stable, Fitch does not expect a significant change in recovery rates for secured and unsecured creditors post the transaction. The transaction will improve Wind's liquidity profile by extending its debt maturity profile, and cash flows through lower interest payments. However, the significant amount of one-off costs related to the refinancing transactions combined with weak EBITDA performance mean that leverage is likely to trend above our net debt/EBITDA threshold of 5.5x by end-2014, with limited de-leveraging over the medium-term. This risk is reflected in today's downgrade. On a standalone basis WIND's rating corresponds to a 'B' level with a Stable Outlook; this is uplifted by one notch for potential parental support. WIND is the number-three mobile operator in Italy having a strong operating track record of consistently outperforming its larger peers. Wind held an approximately 24% subscriber mobile market share and was the second-largest alternative fixed-line/broadband provider with an approximately 16% subscriber market share at end-1Q14. KEY RATING DRIVERS Challenging Operating Environment, Intense Competition The Italian mobile market remains under heavy pressure, with all large mobile operators reporting significant telecoms service revenue declines in yoy terms. We believe that further pressures are likely to continue, driven by the impact of a price war, intense competition and a weak economic environment. Although the price war unleashed in 2Q13 has ended with key players refraining from launching new aggressive tariff plans, the negative impact may linger as customers continue to migrate from legacy pricey tariff plans. However, the negative impact of mobile termination rate (MTR) cuts should abate from 2H14 as the last cut was made in July 2013 and its yoy impact would disappear from July 2014. However, because the brunt of these cuts was primarily felt in 2012-2013, with the latest cut in July 2013 being fairly modest, the expected respite will therefore be small. Wind's MTR rate was cut by only EUR0.72 per minute, compared with EUR1.80 in January 2013 and EUR2.80 in July 2012. Customers remain cost-sensitive in Italy's challenging economy. Unemployment remains high above 12%, and Fitch expects it to peak in 2014, before moderately declining to 12.2% in 2015 (see Fitch's 'Global Economic Outlook' issued on 13 March 2014). We believe Wind will continue to outperform its key competitors in subscriber figures; however, this is unlikely to translate into stronger revenue and EBITDA trends. To a large extent, Wind's outperformance was driven by its price advantage over peers, which has now waned. Its reported average revenue per user (ARPU) was only 5% lower than its closest peer Telecom Italia SpA in 1Q14, compared with 8% at end-2012, 15% at end-2010 and 23% at end-2006. In absolute terms, ARPU difference with Telecom Italia is only equal to EUR0.60, and while customers are still cost-conscious price is becoming less of a differentiator among telecom service providers. In future, Wind may have to increasingly rely on other factors such as advertising and customer service to maintain customer satisfaction, but may also have to make significant network investments to keep parity with peers. Network quality and bundling flexibility are likely to be become stronger competitive factors in the medium term, and Wind is weaker-positioned than its peers on this front. Italy has, so far, been spared from aggressive bundled competition. However, Telecom Italia's strategy suggests a wider use of quad-offers, which, in our view, may lead to a renewed round of price competition on a wider range of services and potential subscriber defections from providers that are unable to offer a competitive quad package as evidenced in Spain and France. Wind is currently lagging its key peers in terms of LTE coverage. Although LTE has not yet become a key competitive factor in Italy, providing Wind with some timing flexibility, the operator can hardly sustain a long lag behind peers without a negative impact on its competitiveness. With both Telecom Italia and Vodafone making substantial investments in LTE roll-out, Wind may be forced to catch up on capex, in turn putting pressure on its cash flows. High Leverage, Limited Deleveraging Capacity Fitch expects Wind's net debt/EBITDA to exceed 5.5x by end-2014 and remain at above this level for the next two to three years. This is driven by continuing EBITDA erosion and one-off refinancing costs in 2014, including call premiums. Wind's refinancing so far in 2014 has resulted in significant interest savings albeit at a cost of substantial one-off expenses. Fitch estimates that it would take more than three years of incremental interest savings to pay off the additional debt from refinancing, diluting the immediate positive impact of lower interest payments on leverage. Deleveraging is likely to be slow. At above 5.5x net debt/EBITDA, Wind's leverage is sensitive to even minor EBITDA pressures. We expect the company's free cash flow (FCF) to remain positive in the medium-term but modest in absolute terms on average with less than EUR250m per annum available for debt reduction in 2015-2017. A planned tower sale is likely to be largely neutral for leverage. Tower sale proceeds would be positive for net debt but would also lead to higher lease payments. Under Fitch's methodology, long-term leases are typically capitalised at 8x, increasing adjusted debt and leverage. As a result, unadjusted leverage metrics would slightly improve while lease-adjusted metrics are likely to worsen. Shareholder Support Positive but Limited Wind's ratings benefit from potential support from its sole ultimate shareholder, Vimpelcom Ltd., whose credit profile remains significantly stronger than Wind's. However, we believe that a further rise in Wind's leverage may diminish Vimpelcom's propensity to provide support for Wind. An increase in leverage to above 6x net debt/EBITDA will no longer likely be consistent with expectations of any parental support. So far Vimpelcom's support has been modest. A EUR500m cash contribution in conjunction with PIK-notes refinancing in 1H14 has been insufficient to materially reduce Wind's leverage, given its limited size relative to Wind's total debt of approximately EUR10bn. Vimpelcom has not committed itself to any additional support. No Short-Term Refinancing Risks Wind does not face any material refinancing risks until 2017 when the un-extended portion of a term loan becomes due. Post-refinancing, the maturity profile is expected to improve as no significant debt repayment will be due before 2019. RATING SENSITIVITIES Negative: Future developments that may individually or collectively lead to negative rating action include -A deterioration in leverage beyond 6x net debt /EBITDA and/or funds from operations (FFO) adjusted net leverage sustainably above 6.5x -Continuing operating and financial pressures leading to negative FCF generation Positive: Future developments that may individually or collectively lead to positive rating action include -Tangible parental support such as equity contribution or debt refinancing via intercompany loans leading to a material reduction in Wind's leverage. -Net debt/EBITDA sustainably below 5.5x and FFO adjusted net leverage sustainably below 6x -Stabilisation of operating and financial performance resulting in stronger and less volatile FCF generation The rating actions are as follows: Long-term IDR: downgraded to 'B+' from 'BB-'; Stable Outlook Short-term IDR: affirmed at 'B' WIND's senior credit facilities: downgraded to 'BB-' from 'BB', assigned 'RR2' Recovery Rating Senior secured 2018 notes issued by WIND Acquisition Finance S.A.: downgraded to 'BB- from 'BB', assigned 'RR2' Recovery Rating Senior secured 2020 notes issued by WIND Acquisition Finance S.A.: downgraded to 'BB-' from 'BB', assigned 'RR2' Recovery Rating Senior secured 2019 floating notes issued by WIND Acquisition Finance S.A.: downgraded to 'BB- from 'BB', assigned 'RR2' Recovery Rating Senior 2017 notes issued by WIND Acquisition Finance S.A.: downgraded to 'B-' from 'B', assigned 'RR5' Recovery Rating Contact: Principal Analyst Giovanni Reichenbach Associate Director +44 203 530 1255 Supervisory Analyst Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Committee Chair Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.