VimpelCom (VIP) Ratings Affirmed by Moody's; Assumes no Further Ruble Deterioration

Moody's Investors Service has today confirmed the Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR) of VimpelCom Ltd. (Nasdaq: VIP). Concurrently, Moody's has confirmed the Ba3 senior unsecured issuer rating of Vimpel-Communications OJSC and Ba3 senior unsecured ratings assigned to debt instruments issued by VimpelCom Holdings B.V., Vimpel-Communications OJSC and VIP Finance Ireland Limited. The outlook on all ratings is stable. This concludes the review for downgrade initiated by Moody's on 23 December 2014.

Moody's primarily bases its assessment of VimpelCom's business and financial profile on its subsidiary VimpelCom Holdings because it consolidates VimpelCom's businesses in Russia and Ukraine, which underpin the VimpelCom group's ability to service its debt obligations through cash distributions from those entities.

RATINGS RATIONALE

Today's confirmation of VimpelCom's ratings reflects Moody's expectation that, assuming there is no further material rouble depreciation beyond the current levels, VimpelCom Holdings will be able to maintain its financial metrics within Moody's guidance for the Ba3 rating. The increase in VimpelCom Holdings' leverage expected in 2015 will likely be temporary and will be mitigated by the company's solid liquidity cushion and balanced debt maturity profile.

Moody's estimates that leverage at VimpelCom Holdings, which was 2.8x adjusted debt/EBITDA as of September 2014, has grown to above 3.0x as of year-end 2014. This rise was mainly because of rouble depreciation, which materially reduced the company's EBITDA in US dollars terms. Moody's expects that the company's EBITDA and margins will decline further in 2015 as a result of the challenging macroeconomic environment and recent national currency depreciation in Russia and Ukraine.

However, assuming there is no further material rouble depreciation beyond current levels, Moody's expects that VimpelCom Holdings will be able to reduce its leverage below 3.0x over the next 12-18 months (although not necessarily by year-end 2015). The rating agency bases this expectation on the assumption that VimpelCom will use the $3.8 billion in proceeds from the recent sale of a 51% stake in its indirect subsidiary Orascom Telecom Algerie SpA (Djezzy, unrated) to reduce debt consolidated at or guaranteed by VimpelCom Holdings or its subsidiaries. In particular, the company has already repurchased around $580 million worth of rouble bonds under put options in March 2015 and is to complete the repurchase of $1.84 billion worth of Eurobonds on 2 April 2015 under the tender offer announced on 2 March 2015.

VimpelCom's Ba3 rating is also supported by (1) the company's solid liquidity with a cash cushion which Moody's estimates at more than $7 billion as of January 2015 following the sale of 51% in Djezzy, out of which more than $6 billion was in US dollars (including only funds at VimpelCom Amsterdam B.V. and VimpelCom Holdings and its subsidiaries), and balanced debt maturity profile; (2) Moody's expectation that the company's position in the Russian mobile market will remain strong, supported by its optimisation of tariff policies, continuing expansion of LTE network and retail network, and advancement in the fixed-line broadband and IP TV segment; (3) Moody's expectation that the parent company's cash requirements will not exert excessive pressure on VimpelCom Holdings' financial metrics; and (4) Moody's expectation that VimpelCom will start receiving regular dividends from Djezzy, although their amount will likely be moderate compared with those that VimpelCom has relied upon from its Russian and Ukrainian subsidiaries.

The rating also considers (1) the deteriorated operating conditions in Russia and Ukraine; (2) the company's exposure to national currencies depreciation, as around 70% of VimpelCom Holdings' revenue is denominated in roubles and 10% in hryvna, while more than 75% of debt is denominated in US dollars (as of year-end 2014); (3) the increasing competition in the Russian telecommunications market; (4) substantial capital expenditure (capex) needed for continuing expansion of VimpelCom's mobile data network in Russia; and (5) some uncertainty over VimpelCom's capex outlays in Russia related to the reallocation of LTE frequencies currently used by the military.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on the ratings reflects Moody's expectation that (1) VimpelCom Holdings will maintain financial metrics commensurate with the rating agency's guidance for the Ba3 rating on a sustainable basis (although not necessarily at year-end 2015), while retaining its market share in Russia and adequate liquidity, and (2) there will be no excessive requirements on VimpelCom Holdings' cash flows on behalf of the larger group.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the ratings is unlikely over the next 12-18 months considering the macroeconomic outlook for Russia. Moody's could consider an upgrade of VimpelCom's ratings if (1) the macroeconomic environment in Russia were to stabilise; (2) VimpelCom Holdings' debt/EBITDA were to decline below 2.0x (Moody's-adjusted) on a sustainable basis; and (3) the company were to maintain its market position in Russia and adequate liquidity. This assumes no material M&A transactions or debt or corporate reorganisations within the group, and current ring-fencing mechanisms at VimpelCom's business in Italy remaining in place.

Conversely, Moody's could downgrade VimpelCom's ratings if VimpelCom Holdings' debt/EBITDA were to rise above 3.0x (Moody's-adjusted) on a sustained basis or VimpelCom Holdings' operating profile, market position or liquidity were to deteriorate materially.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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