OREANDA-NEWS. Fitch Ratings says the impact of a merger of Vimpelcom's Wind and Hutchison's 3 Italia and deconsolidation of Wind's results from Vimpelcom's financial reporting is largely neutral for Vimpelcom's credit profile as Fitch has always excluded Wind from its analysis of the Vimpelcom group. Fitch has calculated Vimpelcom's leverage metrics without Wind because the entity is ring-fenced and its default would not trigger a default by the parent. Cash flow from the entity has been restricted by the terms of Wind's loan and bond documentation.

CK Hutchison Holdings Ltd. (A-/Stable), parent company of Italian mobile operator 3 Italia, and VimpelCom Ltd. (BB+/Stable), parent company of Wind (B+/Stable), received regulatory clearance to form a 50/50 joint venture (JV) of their telecommunication businesses in Italy on 1 September 2016.

We have never expected Vimpelcom to provide significant shareholder support to Wind, and estimated any potential impact on the parent's leverage as modest. Vimpelcom was likely to extend liquidity support on an as necessary basis or make modest equity injections to facilitate Wind's refinancing efforts, but we have always assumed that a large-scale bail-out was a remote possibility.

The new JV will have a stronger credit profile than Wind on a standalone basis, and be much less dependent on any additional parental contributions. Vimpelcom's equity interest in the JV has been diluted to 50%, reducing economic incentives for providing shareholder support. We no longer expect that Vimpelcom would need to extend any additional shareholder support to the JV.

Any significant dividends from Wind are unlikely in the short to medium term. Management estimates that the JV's leverage will be close to 5x net debt/EBITDA after the deal closes, and it expects to start paying dividends once leverage drops to below 4x, a covenanted threshold. Rapid deleveraging seems unlikely as management plans to increase network investments, with Vimpelcom guiding for EUR7bn investments in Italy over the next five years.

Vimpelcom's rating continues to be driven by its stable operating performance outside Italy, and most notably in Russia, while its cash flow and leverage profile is sensitive to foreign currency exchange movements. Management expects leverage to approach 2x net debt/EBITDA by end-2016, an increase driven by an acquisition of Warid in Pakistan and emerging markets currencies' weakness. We estimate that Vimpelcom's leverage at the end of 2016 may approach or slightly exceed Fitch's defined downgrade threshold 2.25x net debt/EBITDA.- This is with Wind and the Algerian operations deconsolidated by Fitch but reflecting their regular dividend contributions to Vimpelcom (Wind has not paid any dividends so far).

Vimpelcom's current deleveraging capacity is supported by its low dividends. This may be compromised if the company restarts paying higher shareholder remuneration. Management has announced that the closing of the Wind/3 Italia merger could be a major milestone, triggering a dividend policy review no later than in early 2017. A failure to maintain leverage below our downgrade threshold on a sustainable basis, whether due to higher shareholder payouts or weaker than anticipated operational performance, may put pressure on Vimpelcom's ratings.