OREANDA-NEWS. March 10, 2015. Fitch Ratings has assigned Wind Telecomunicazioni SpA's (Wind) proposed senior secured loan an expected 'BB-(EXP)'/'RR2(EXP)' rating. The proposed loan will effectively be a senior secured obligation of Wind ranking pari passu with other senior secured debt. The 'BB-(EXP)'/'RR2(EXP)' expected rating reflects Fitch's expectation of high recoveries for secured creditors.

The final rating is contingent upon the receipt of final documents conforming to information already received.

The new term loan issue proceeds will be used for the repayment of the EUR100m drawn RCF and a partial repayment of the existing EUR1.7bn term loans. Following the repayment, the old EUR600m RCF will be replaced with the new EUR400m facility. Fitch understands that the remaining part of the existing term loans will likely be refinanced with the proceeds from the announced tower sale (EUR693m) and new debt instruments.

On a standalone basis, Wind's rating corresponds to 'B'/Stable. Wind's Issuer Default Rating is lifted by one notch to 'B+' for potential parental support. Wind is the number-three mobile operator in Italy with a subscriber market share of approximately 25% and the second-largest alternative fixed-line/broadband provider with a subscriber market share of approximately 16% at end-2014. Its leverage is high, reported at 5.9x net debt/EBITDA at end-2014.

KEY RATING DRIVERS
Challenging Operating Environment
The Italian mobile market continues to contract in revenue terms. However, there are signs that the pricing war may be over. Key operators expect less direct tariff competition, with network quality issues coming to the fore. Wind demonstrates strong relative outperformance slowly increasing its subscriber market share, but this is not sufficient to protect it from absolute revenue and EBITDA declines. The weak economic environment in Italy continues to weigh on customer sentiment.

Stable Fixed-Line
Wind has 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.

High Leverage
Wind's leverage is high, reported at 5.9x net debt/EBITDA at end-2014. We estimate that the impact of the tower sale on leverage will be marginally positive as the reduction in net debt on the back of cash proceeds will be muted by increased rent expense, which Fitch capitalises at a multiple of 8 and adds to the total debt for funds from operations (FFO) adjusted net leverage calculation. The refinancing would improve the company's maturity profile and lead to interest savings.

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 year available for debt reduction in 2015-2017.

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. An increase in leverage to above 6x net debt/EBITDA will no longer likely be consistent with expectations of any parental support.

Vimpelcom's support has been modest so far. A EUR500m cash contribution in conjunction with PIK-notes refinancing in 1H14 was 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 before 2019 when the bulk of its debt comes due. Post-refinancing, the maturity profile is expected to improve.

KEY ASSUMPTIONS
-Continuing modest revenue declines tempering from mid-single digit territory in 2015 to low-single digits afterwards.
- EBITDA margin stabilising at above 37%.
- Interest rate savings on the back of refinancing in 2014.
- Substantial on-going network investments with capex to revenue ratio of above 15% in the medium-term.
- No common dividends.
- No equity injection from the parent.

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 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.