6 Oct 2010 13:17

Moody's places VimpelCom on review for possible downgrade after merger announcement

LONDON. Oct 5 (Interfax) - On Wednesday, Moody's Investors Service placed the Ba2 ratings of VimpelCom OJSC on review for possible downgrade in response to the recent announcement about the merger between VimpelCom Limited (which owns VimpelCom OJSC) and Weather Investments SpA (not rated) to create the world's fifth-largest mobile telecoms company by number of subscribers.

The agency said in a statement: "At the same time, Moody's has today also taken the following rating actions on the rated subsidiaries of Weather: the B2 rating of Orascom Telecom Holdings s.a.e. has been placed on review with direction uncertain, having previously been on review for downgrade; and the outlook on the Ba3 rating of Wind Telecomunicazioni SpA has been changed to developing from negative.

"Under the terms of the transaction with Weather, VimpelCom Limited will own 51.7% of Orascom Telecom and 100% of Wind in exchange for a cash consideration of USD1.8 billion and a 20% economic interest in the enlarged VimpelCom group.

"The cash considerations will be financed from VimpelCom's existing cash and new debt. A number of assets -- including the 35% stake in ECMS (Egypt), 75% stake in Koryolink (North Korea) and some of Orascom Telecom's sub-sea cable and internet portal assets, also including the Libero internet portal, Wind International Services, and one of Wind's sub-sea cable operation -- will be de-merged after the transaction has closed.

"Although the financing structures at Wind and Orascom Telecom have not yet been clearly defined, Moody's notes that the merger announcement stipulates the retention of existing ring-fencing structures as well as the refinancing of certain debt within the Weather group. Specifically, VimpelCom plans to refinance part of Orascom Telecom's holding company debt with an Intercompany loan.

"In addition, Moody's understands that the transaction will trigger certain change of control provisions over existing debt within the Weather group and that waivers will consequently be sought. The companies expect the transaction to be completed in Q1 2011, and the de-merger of Orascom Telecom and Wind assets to be finalised by Q3 2011.

"Moody's review for the possible downgrade of VimpelCom's ratings will focus on the extent to which the numerous benefits of the deal for VimpelCom will offset the potentially higher business risk associated with some of Weather's assets, as well as the financial implications for VimpelCom OJSC of the funding and future cash flow needs within the group structure.

"The merger will be positive for VimpelCom in terms of the enhancement of the scale and scope of the combined operations, the exposure of VimpelCom to an international footprint and the potential synergies and deleveraging to be achieved. Moreover, Moody's also notes that the transaction is priced at relatively moderate multiples compared with recent industry deals. Moody's decision to change the outlook on Wind's ratings to developing from negative reflects the potential benefits that Wind will derive from being part of a more stable and financially sound telecoms group.

"The developing outlook also reflects the company's continued limited financial flexibility and headroom within the existing rating category. Moody's has decided not to place the group on review at this stage in light of the announcement that the existing financial arrangements (and ring-fencing) within Wind will be retained. Moody's will continue to closely monitor the operating performance of the company going forward and will resolve the outlook once there is sufficient clarity on the progress of the transaction.

"Moody's decision to change Orascom Telecom's status from being on review for possible downgrade to being on review with direction uncertain reflects the potential for wider rating changes compared to Wind. Orascom Telecom's previous status of review for possible downgrade was based on concerns about the immediate parent's (OTH) liquidity profile, but the change in the review status indicates that these concerns could potentially be alleviated upon the completion of the transaction and associated refinancing initiatives at the Orascom Telecom level.

"Should the deal fail to succeed or completion be materially delayed, then Moody's believes that the existing liquidity pressures on Orascom Telecom's ratings would likely result in a downgrade. The review process will focus on (i) the implications of the transaction on Orascom Telecom's standalone financial risk profile following the refinancing of Orascom Telecom's existing debt and the disposal of assets -- the proceeds of which will flow out of the group -- and (ii) the impact of the ring-fencing from VimpelCom.

"The rating review process will also closely monitor the consent/waiver process that will need to be resolved with the Weather Group's existing creditors as a result of the trigger of the change in the control clauses. Moody's says that there could potentially be further rating actions as further clarity on the transaction materialises, particularly with regard to financial policies or the assumptions made in these actions. Headquartered in Moscow, Russia, VimpelCom OJSC is a leading Russian telecommunications operator, providing voice and data services through a range of wireless, fixed and broadband technologies."