Moody's Changes Wind's Rating Outlook to Negative from Stable
Moody's Investors Service has changed the rating outlook on Italian mobile network, Wind Telecomunicazioni to negative from stable. At the same time, Moody's has affirmed the company's B1 corporate family rating (CFR) and B1 probability of default rating (PDR) as well as the Ba3 rating on the company's senior secured bank facilities and senior secured notes due 2018 and the B3 rating on the senior notes due 2017.
Concurrently, Moody's has assigned a Caa1 CFR and Caa1 PDR to Wind Acquisition Holdings Finance (WAHF) and affirmed the Caa1 rating on the PIK notes due 2017 issued at the Wind Acquisition Holdings Finance S.A. level. The rating outlook at WAHF is also negative.
Wind's ratings continues to reflect the company's (i) solid market share of the telecommunications services in Italy and its strong competitive positioning vis-à-vis its main competitors, Telecom Italia and Vodafone; (ii) diversified business model into mobile, fixed line and broadband internet; and (iii) the company's stable performance in 2011 and H1 2012 on the back of successful campaigns to attract new subscribers and grow its data revenues.
The change of outlook to negative incorporates Moody's views on the future performance of Wind which could be negatively impacted by continued drops in ARPU and increased competitive pressures which would erode the company's EBITDA margins. The outlook also reflects the macro-economic conditions in which the company is operating and expectations that the Italian economy, and with it consumer spending, could contract in the coming year putting pressure on the local telecommunications industry in general as users look to reduce usage.
In the six months ended 30 June 2012, Wind reported marginal declines in revenues and EBITDA of respectively -0.7% and -1.1% vs. H1 2011 mainly driven by a substantial drop in ARPU (-5.5% for Mobile ARPU) which was only partially mitigated by an increase in subscriber numbers of 3.2%.
At the start of July 2012 Wind saw the introduction of a further MTR cut to 2.5 cents from 5.3 cents, representing a 53% decline. In January 2013 interconnect rates will decrease by a further 40% to 1.5 cents. The combined impact of those cuts will drive a substantial drop in ARPU in 2013 compared to 2012.
Although Wind has recently managed to mitigate MTR-led ARPU drops by increasing its subscriber base, the company's competitive advantage relies on aggressively low pricing and positioning itself as the only value provider. Going forward, it remains vulnerable to a competitive reaction from Vodafone and Telecom Italia that could jeopardise Wind's subscriber growth efforts and also its margins.
Wind's liquidity profile is weak despite the only debt maturity in 2013 being €81 million due on the Ministry loan granted in relation of the 2011 LTE auction. Beyond 2013, €125 million is due in May 2014, and a further €81 million due in October and €125 million in November of the same year. Meagre free cash flow generation in relation to its debt means that Wind company may need to enter into strict cash flow management in terms of capex and working capital or require external funding over this period to deal with these maturities.
The negative outlook reflects Moody's concerns over the economic environment it Italy, which could pressure Wind's current profitability levels. In addition, the outlooks reflect the potential risks associated with near-term debt refinancing requirements.