Moody's Upgrades VimpelCom (VIP) to 'Ba2'; Outlook is Stable
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Moody's Investors Service, ("Moody's) has upgraded the corporate family rating (CFR) of VimpelCom Ltd (Nasdaq: VIP) to Ba2 from Ba3, and the probability of default rating (PDR) to Ba2 -PD from Ba3-PD. Concurrently the agency upgraded the long-term issuer ratings of VimpelCom PJSC to Ba2 from Ba3 and the senior unsecured ratings of its guaranteed debts issued by VIP Finance Ireland Limited and VimpelCom Holdings B.V., to Ba2 (LGD 3) from Ba3 (LGD 3). Moody's has also upgraded the senior unsecured rating of the debts issued by GTH Finance B.V. and guaranteed by VimpelCom Holdings B.V. to Ba3 (LGD 5) from B1 (LGD 5).
The outlook on all ratings is stable.
Today's action reflects Moody's view that the financial and operational risks related to the ownership of Wind Telecomunicazioni S.p.A. (Wind, B2 positive), a highly leveraged telecommunications asset in Italy, have substantially subsided for VimpelCom as a result of its deal with CK Hutchison Holdings Limited ("CK Hutchison", A3 stable). The deal, approved by the European Commission on 1 September 2016 and by the Ministry of Economic Development of Italy on 24 October 2016, combines VimpelCom's 100% owned subsidiary Wind with Hutchison's subsidiary 3 Italia S.p.A (not rated) in a 50/50 joint venture. Whilst Moody's maintains a view that deconsolidation of Wind's debt does not fully relieve VimpelCom's credit profile of all contingent liabilities associated with high levels of Wind's indebtedness, the agency considers such risks largely mitigated by the partnership with a strong strategic investor such as Hutchison. Moody's notes that the JV transaction was set up as cash free for Vimpelcom while Hutchison contributed EUR200 million, however the agreement envisages a possibility of partner buyout in three years' time (i.e. in 2019), which may create additional cashflow opportunities for VimpelCom.
Other recent developments such as (1) the successful sale of 51% stake in VimpelCom's asset Djezzy (not rated) in Algeria, which brought VimpelCom a meaningful cash consideration and allowed it to regain access to Djezzy's dividends from 2016, (2) completion of the cash settlement relating to the US and Dutch authorities' investigation of the company's activities in Uzbekistan in 2016, and (3) self-sufficiency in cash generation achieved by the subsidiaries Pakistan Mobile Communications Limited (B1, stable, operating under a brand Mobilink) and Banglalink Digital Communications Limited (Ba3, stable) in 2015, support Moody's view that VimpelCom's risk profile has materially improved. While Russia contributed 49% to the group's revenue and 44% to its EBITDA in full-year 2015 (after deconsolidation of Wind from Q3 2015), as well as the bulk of the dividend flow, Moody's expects other subsidiaries including Ukraine to provide up to 50% of the dividend flow available to the group by 2018-19.
VimpelCom's Ba2 CFR reflects (1) the company's strong positions in its key markets: third largest in terms of subscribers in Russia with 57.4 million subscribers, first largest in the Ukraine with 25.4 million subscribers and in Pakistan with 39.1 million; and second largest in Bangladesh with 31.1 million; (2) VimpelCom's improving financial metrics and diminishing risks as the group streamlines its asset structure in several ways, including via disposals; and (3) the company's solid liquidity and balanced debt maturity profile, underpinned by its meaningful cash balances.
Whilst this upgrade narrows the differential between the ratings of VimpelCom and its Russian peers Mobile Telesystems PJSC (MTS, Ba1 negative) and Megafon PJSC (Ba1 negative) to one notch from two previously, we still note that 1) VimpelCom maintains leverage higher than its peers as measured by gross debt/EBITDA, although on a net-debt basis the metrics are more comparable; 2) somewhat weaker profitability and financial metrics, in particular debt coverage; 3) elevated foreign currency risk, with more than 70% of the company's debt denominated in US dollars and revenues in roubles, hryvnias and other currencies.
Despite broader geographical diversification than its Russian peers, VimpelCom remains exposed to the Russian market, with its high saturation levels and challenging competitive landscape. In addition, falling personal incomes and an economic slowdown in Russia, Ukraine and the CIS countries amid devaluation of local currencies and elevated cost inflation will, in our view, continue to put pressure on all the telecommunications operators, including VimpelCom's subsidiaries in these countries in the next 12-18 months.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on VimpelCom's rating reflects Moody's expectation that the company will sustainably maintain its leverage below 3.0x times on a gross-debt basis and around 2.0x on a net-debt basis, and RCF/Debt above 20%. The agency expects that VimpelCom will maintain a robust liquidity profile and address its refinancing needs in a timely fashion.
WHAT COULD CHANGE THE RATING UP/DOWN
A sustainable reduction in leverage measured by gross debt/EBITDA to below 2.0x and strengthening of coverage metrics so that they are consistent with an upper Ba or a lower Baa rating categories would exert positive pressure on the ratings, provided that there are no negative developments in the company's operating profile, market positions and liquidity.
Conversely, a material deterioration in its operating and financial profile measured by (1) a sustainable increase in leverage measured by gross debt/EBITDA above 3.0x, and (2) a weakening of RCF/debt to below 20% would put pressure on the ratings. We would assess any material acquisition/shareholder distribution; such actions could exert negative pressure on the ratings.
The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The local market analyst for GTH Finance B.V. ratings is Julien Haddad, Analyst, Corporate Finance Group, Journalists 44 20 7772 5456, Subscribers 44 20 7772 5454.
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