VimpelCom (VIP) Ratings Affirmed by Moody's Amid New Italian JV

Moody's Investors Service said that the announced decision by VimpelCom Ltd (VimpelCom, Ba3 stable) (NYSE: VIP) and CK Hutchison Holdings Limited (A3 stable) to combine VimpelCom's 100% owned Italy-based telecom asset Wind Telecomunicazioni S.p.A's (Wind, B2 corporate family rating (CFR)) and Hutchison's 100%-owned wireless operator 3-Italia under a 50/50 owned joint venture (JV) is credit neutral for VimpelCom's ratings.

The transaction will help to deleverage VimpelCom as Wind, which contributes around a third of the group's EBITDA and holds approximately half of its debt, will be accounted for on an "assets and liabilities held for sale" basis starting in 2015, and become fully deconsolidated from mid-2016 after completion of the deal. The partners will finalise the merger of the telecom businesses in 2017, subject to regulatory approval. Moody's does not expect any cash contribution either to be paid or to be received by VimpelCom in the course of the transaction. Dividend expectations from the merged entity are broadly in line with Moody's assumptions for distributions from Wind (subject to leverage and free cash flow generation), although payouts may now commence at an earlier date as the merged entity should demonstrate better deleveraging dynamics. 3-Italia is entering the joint venture debt free and contributing around 20% to consolidated EBITDA.

Because Moody's rating analysis historically excluded the de-facto ring-fenced Wind operations and was driven by the Russia, Ukraine and CIS businesses incorporated under the interim consolidated entity VimpelCom Holdings B.V., the de-leveraging at the VimpelCom group level will not affect Moody's view of the group's debt/capital and financial profile. Conversely, the weakened macro environment in Russia and Ukraine will weigh upon the rating agency's outlook for the group's operating profile and its resilience to emerging market risks. Material cash balances in excess of $4.2 billion, largely represented by cash proceeds from the sale of a 51% stake at the Algerian asset Omnium Telecom Algeria SpA (Djezzy), underpin Moody's assessment of the group's liquidity (Moody's notes that VimpelCom already applied $3.0 billion of the Algerian proceeds to repay debt, including $1.9 billion worth of Eurobonds, $0.5 billion loans, and RUB35 billion rouble bonds). However, the rating agency continues to base its guidance for the rating on a gross debt assumption because (1) there is no clear indication of the amount of these funds earmarked for deleveraging, and the timeline for deleveraging; and (2) the reduction in leverage measured by net debt/EBITDA at VimpelCom Ltd. to below 2.0x provides an opportunity for the company to contemplate a ramp-up in shareholder distributions, a step that would lead to an erosion of the cash buffer. Moody's also notes that prior to the acquisition of Wind completed in 2011, VimpelCom demonstrated a track record of large debt-financed bolt-on acquisitions.

At the same time, Moody's changed the outlook on Wind's ratings to positive from stable, reflecting its understanding that the ultimate combination of the telecom businesses will create a stronger competitor with a less leveraged financial profile. Please refer to Moody's press release on Wind at http://www.moodys.com/viewresearchdoc.aspx?docid=PR_331808.

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