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April 7 (The following statement was released by the rating agency)
Fitch Ratings has assigned Wind Acquisition Finance S.A.'s proposed EUR3,750m (equivalent) senior notes due 2021 a 'B(EXP)' expected rating. The notes will be guaranteed by Wind Telecomunicazioni S.p.A (Wind). Fitch has also affirmed Wind's Long-term Issuer Default Rating (IDR) at 'BB-' with a Negative Outlook. A full list of rating actions is at the end of this commentary.
The proposed notes will effectively be a senior unsecured obligation of Wind subordinated to approximately EUR6bn of senior secured debt. The 'B(EXP)' expected rating reflects Fitch's expectation of fairly low recoveries for unsecured creditors. The issue proceeds will be applied to redemption of the existing unsecured notes and payment of over EUR800m to Wind's immediate parent, Wind Acquisition Holdings Finance S.A., which will apply the proceeds plus a EUR500m cash injection provided by Vimplecom Ltd, towards the repayment of its existing PIK notes. As a result, the amount of unsecured debt at Wind's restricted group level is likely to increase, reducing recoveries for unsecured creditors. The PIK instrument is expected to be redeemed post refinancing.
On a standalone basis, WIND's rating corresponds to 'B+' with a Negative Outlook. This is uplifted by one notch for potential parental support. The Negative Outlook is driven by continuing operating pressures and shrinking EBITDA leading to higher leverage on the back of weak free cash flow generation.
WIND is the number-three mobile operator in Italy with a subscriber market share of approximately 24% and the second-largest alternative fixed-line/broadband provider with a subscriber market share of approximately 16% at end-2013. Its leverage is high at 5.3x net debt (including PIK debt)/EBITDA at end-2013.
KEY RATING DRIVERS
Difficult Operating Environment
The Negative Outlook reflects continuing revenue and EBITDA erosion, and the likelihood that this negative trend will persist. The Italian mobile market has experienced significant re-pricing, with Wind being at the forefront of tariff competition. The company has managed to erode the market shares of its peers but at the expense of average revenue per user (ARPU) across the industry. Mobile termination rate (MTR) cuts were also a major negative factor behind ARPU pressures, in addition to tariff under-cutting. Austerity in Italy further weighs on the telecoms market. 2014 is likely to be less negative following the end of MTR cuts in July 2013.
Wind significantly improved profitability in its fixed-line segment, which we believe should be sustainable with continuing focus on more profitable direct customers. Fibre roll-out in Italy is likely to be slow, protecting Wind's position as the largest alternative fixed-line operator in Italy.
Wind's leverage is high at 5.3x net debt (including PIK debt)/EBITDA at end-2013 (Fitch defined). We estimate that leverage may further increase by end-2014 due to continuing EBITDA and cash flow pressures but also significant one-off refinancing costs, which are likely to push 2014 free cash flow to negative territory.
Shareholder Support Positive but Limited
Wind's ratings benefit from potential support from its sole ultimate shareholder, Vimpelcom, whose credit profile remains significantly stronger than Wind's. However, a EUR500m cash contribution from Vimplecom has been insufficient to materially reduce Wind's leverage given its limited size relative to Wind's total amount of debt of approximately EUR10bn. In addition, Vimpelcom has not committed itself to additional support. We believe that a further rise in Wind's leverage may diminish Vimpelcom's propensity to provide support for Wind.
No Short-Term Refinancing Risks
Wind does not face any material refinancing risks before 2016 when the bulk of its debt comes due. Post-refinancing, the maturity profile is expected to improve.
Negative: Future developments that may individually or collectively lead to negative rating action include
-A deterioration in leverage beyond 5.5x net debt (including PIK debt)/EBITDA for a sustained period.
-Low-to-mid single digit decline in operating profitability in 2014 driven by a further deterioration in the operating environment and/or 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.
-Stabilisation of operating and financial performance
The rating actions are as follows:
Long-term IDR: affirmed at 'BB-'; Negative Outlook
Short-term IDR: affirmed at 'B'
WIND's senior credit facilities: affirmed at 'BB'
Senior secured 2018 notes issued by WIND Acquisition Finance S.A.: affirmed at 'BB'
Senior secured 2020 notes issued by WIND Acquisition Finance S.A.: affirmed at 'BB'
Senior secured 2019 floating notes issued by WIND Acquisition Finance S.A.: affirmed at 'BB'
Senior 2017 notes issued by WIND Acquisition Finance S.A.: affirmed at 'B'
Senior PIK notes issued by WIND Acquisition Holdings Finance S.A.: affirmed at 'B-'