Wind Telecomunicazioni S.p.A. -- Moody's changes Wind's rating outlook to negative from stable (CFR B1); assigns Caa1 CFR to WAHF S.p.A.

Concurrently, Moody's has assigned a Caa1 CFR and Caa1 PDR to Wind Acquisition Holdings Finance S.p.A. ("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.

RATINGS RATIONALE

Wind's B1 CFR 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.

At the same time, the B1 CFR reflects (i) Wind's high leverage expected to be close to 4.6x debt to EBITDA (as adjusted by Moody's and excluding the WAHF PIK notes); (ii) limited medium-term de-leveraging prospects with weak free cash flow to debt (iii) the uncertainty over future performance as the macro-economic outlook in Italy is expected to continue to deteriorate in the coming year (iv) the expected negative impact of aggressive mobile termination rates (MTR) introduced in July 2012; and (v) the group's complex capital structure and the lack of explicit potential support from its ultimate parent, the Vimpelcom Ltd group (Ba3).

The assignment of a separate CFR and PDR at WAHF reflects the structural ring-fencing between WAHF and Wind, with no cross-default into Wind from WAHF. The Caa1 also reflects the fact that the PIK notes are required to pay cash interest from 2014 and that this cash payment, absent support from Vimpelcom, should come from Wind upstreaming cash to WAHF. However, Moody's expects that Wind will be restricted by its facilities agreement in making upstream payments at that time. This increases the risk of default at WAHF compared to the default probability of Wind. One positive outcome would be for Vimpelcom to service this cash interest requirement at WAHF although the current ratings assume no support from the parent.

WAHF's Caa1 ratings also reflect Moody's expectation that in the case of a default of Wind, WAHF would also default. In this case there would be a very low or no recovery for the PIK.

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 EUR81 million due on the Ministry loan granted in relation of the 2011 LTE auction. Beyond 2013, EUR125 million is due in May 2014, and a further EUR81 million due in October and EUR125 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.

Rating Outlook

The negative outlooks on both Wind and WAHF reflect 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.

What Could Change the Rating - Up

Given the uncertainty over the economic environment and the lack of any material deleveraging expectations, there is limited positive rating pressure. The rating outlooks could be stabilized if Wind demonstrates sustained deleveraging or material positive free cash flow generation. They could also be stabilized following positive support demonstrated by Vimpelcom.

Upward ratings pressure on WAHF is limited by the high probability of default on the PIK.

What Could Change the Rating - Down

The ratings could be downgraded should Wind's leverage rise towards 5x. Downgrades could also occur if free cash flow generation moves closer towards zero, if there were any deterioration in the liquidity profile, or if there were no evidence of either Wind or WAHF refinancing its debt well ahead of maturities.

Negative ratings pressure on WAHF would develop in line with any further negative pressure on Wind or if there remains no solution, in the medium term, to service the 2014 cash interest on the current PIK.

The principal methodology used in rating Wind Telecomunicazioni S.p.A., Wind Acquisition Holdings Finance S.p.A and Wind Acquisition Holdings Finance S.A. was the Global Telecommunications Industry Methodology 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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Wind Telecomunicazioni SpA have received a Rating Assessment Service within the last two years preceding the Credit Rating Action.

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Christian Azzi Analyst Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Chetan Modi MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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