Fitch Affirms Wind Italy's Debt Ratings with a Negative Outlook

Published on: 14th Jul 2012

Fitch Ratings has affirmed Italian telco, Wind Telecomunicazioni's ratings, including its Long-term Issuer Default Rating (IDR) at 'BB' with a Negative Outlook.

?The Negative Outlook primarily reflects Wind's low capacity to withstand further pressures which are probable in view of austerity, declining GDP and high unemployment in Italy. Capacity to reduce leverage from free cash flow is tight due to high interest payments and capex while even modest EBITDA declines are likely to trigger an increase in leverage to above what would be consistent with the current ratings level.

Wind's ratings continue to benefit from potential support from its sole ultimate shareholder, Vimpelcom, whose credit profile remains notably stronger than Wind's. On a standalone basis, Wind's credit profile corresponds to a 'BB-' level, which is uplifted by one notch for benign shareholder influence.

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. On the mobile side, Wind has been able to outperform both Telecom Italia and Vodafone Group reporting stronger revenue dynamics and improving its market share at the expense of these two operators. Wind became the largest fixed-line/broadband provider in Italy after Telecom Italia although followed by a number of close peers.

The company is likely to continue outperforming its domestic peers; however, the pace of improvement may slow down as the company's price advantage has diminished over a number of years. At end-Q112 Wind's mobile average revenue per user (ARPU) was only 9% lower vs. its closest peer Telecom Italia as compares to 15% at end-2010 and 23% at end-2006.

Mobile termination rate (MTR) cuts will eat into revenues and EBITDA in 2012 and 2013. Wind guided that MTR cuts would result in EUR250m reduction of interconnect revenues in 2012 triggering EUR60m - EUR70m of EBITDA losses. It would be a challenge to mitigate this by cost cutting and efficiency improvements as planned. 2013 MTR cuts are likely to result in revenue losses similar to 2012.

Growth prospects are bleak overall. The Italian mobile market is mature, with headline SIM penetration at above 150% at end-2011. Although headline subscriber growth remains positive primarily driven by wider smartphone, tablet and dongles proliferation, ARPU has been under pressure, with declining voice revenue not fully compensated by the growth in data services.

Wind's leverage is high for its rating level at 4.9x net debt (including PIK debt)/EBITDA at end-2011 (Fitch defined) as a result of EUR1,144 LTE spectrum investment in 2011. Deleveraging is critically dependent on Wind's ability to maintain positive growth (barring the interconnect impact) and capex discipline, and is projected by Fitch to be sluggish at best.

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 EUR500m of 2018 senior secured notes tap issue in April 2012. Along with cash on the balance sheet, this was used to prepay EUR500m of 2012 and 2013 Term Loan A bank amortising facilities and EUR250m of bridge spectrum facility. Fitch estimates that Wind can generate sufficient cash flows to repay the remaining EUR250m portion of the bridge from internal funds in 2012. Alternatively, there is an option to extend this facility for six years.

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Tags: [Italy ]?

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