WIND’s ratings continue to benefit from potential support from its sole ultimate shareholder, Vimpelcom Ltd., whose credit profile remains stronger than WIND‘s. On a standalone basis, WIND’s credit profile corresponds to a ‘B+’ level, which is uplifted by one notch for benign shareholder influence. However, Fitch cautions that Vimpelcom has not committed itself to any level of support. Fitch believes that a further rise in WIND’s leverage may diminish Vimpelcom’s propensity for providing a helpline to WIND.
WIND’s credit profile is supported by its established position as the facilities-based number-three mobile operator in Italy, complemented by an expanding alternative fixed-line/broadband business. WIND has been able to outperform both Telecom Italia SpA (‘BBB’/Negative) and Vodafone Group Plc (‘A-'/Stable) reporting stronger revenue dynamics and improving its market share at the expense of these two operators.
The company may continue outperforming its domestic peers. However, the pace of improvement is likely to slow as the company’s price advantage has been significantly dented over a number of years while WIND’s current tariff plans are closely matched by peers. At end-Q212 Wind’s ARPU was only 7% lower vs. its closest peer Telecom Italia compared to 9% at end-Q112, 15% at end-2010 and 23% at end-2006.
MTR cuts will eat into revenues and EBITDA in 2012 and 2013. Wind guided that MTR cuts would result in a EUR250m reduction of interconnect revenues in 2012 triggering EUR60m-EUR70m of EBITDA losses. Planned 2013 MTR cuts are likely to result in similar revenue losses. Fitch no longer expects that these declines can be compensated through other initiatives. Margins will be helped by the cost cutting programme expected to start in 2013. This project envisages a 10% salary cut coupled with productivity improvements, and was supported by the trade unions and the government.
WIND’s leverage was high at 4.9x net debt (including PIK debt)/EBITDA at end-2011 (Fitch defined). The agency expects this metric to rise to slightly above 5x by end-2012 while the deleveraging capacity will be compromised by regulatory and austerity headwinds, at least in 2012 and 2013. Wind is currently seeking additional waiver headroom on its leverage covenants under the bank documentation. The requested approximately 0.6x net debt/EBITDA headroom corresponds to the rise in leverage due to the 2011 LTE spectrum acquisition.
On a positive note, Wind does not face any material refinancing risks before 2017 when the bulk of its debt maturities come due. The company successfully placed a EUR500m 2018 senior secured notes tap issue in Q112 which helped it to refinance EUR250m of 2012 bank amortising facilities and repay a EUR500m bridge spectrum facility (the EUR250m portion of the latter facility was fully repaid with cash on the balance sheet in September 2012).
Negative: Future developments that may, individually or collectively, lead to negative rating
-Deterioration in leverage beyond 5.5x net debt(including PIK debt)/EBITDA for a sustained period
-Pressures on EBITDA/FCF generation driven by regulation, austerity and competition
Positive: Future developments that may nonetheless potentially lead to a positive rating
-Any evidence of tangible parental support such as equity contribution or debt refinancing via intercompany loans.
-Stabilisation of operating and financial performance following MTR cuts in 2012 and 2013
The rating actions are as follows:
Long-term IDR: downgraded to ‘BB-’ from ‘BB’; Negative Outlook
Short-term IDR: affirmed at ‘B’
WIND’s senior credit facilities: downgraded to ‘BB’ from ‘BB+’
Senior secured 2018 notes issued by WIND Acquisition Finance S.A. : downgraded to ‘BB’ from ‘BB+’
Senior 2017 notes issued by WIND Acquisition Finance S.A.: downgraded to ‘B+’ from ‘BB-’
Senior PIK notes issued by WIND Acquisition Holdings Finance S.A.: downgraded to ‘B’ from ‘B+'