6 IN. DI LETTURA
* Wind Telecom's structure could prevent PIK payment next year
* Pressure on Wind to refinance EUR10bn debt pile
* VimpelCom's in-house bank expected to come into play
By Robert Smith
LONDON, Aug 15 (IFR) - Italian telecoms firm Wind's long-awaited jumbo refinancing could occur in less than a year, as market sources believe that the company's structure restricts it from paying the first cash coupon on its payment-in-kind notes in July.
Wind's Russian owner VimpelCom has remained tight lipped on how it intends to tackle the Italian firm's debt - which exceeds EUR10bn including debt at the holding company, Wind Acquisition Holdings Finance (WAHF) - but investors and analysts say that the impending PIK payment could force the company's hand in 2014.
Although some of Wind's debt carries double-digit interest payments, funding costs would be slashed if VimpelCom on-lent funds to its subsidiary. Investors are particularly concerned whether Wind can repay nearly EUR5.5bn of debt due in 2017 without support from its parent.
This comprises EUR2.7bn-equivalent of high interest 11.75% senior notes, over EUR2bn in senior credit facilities, and a further EUR790m-equivalent in PIK notes issued out of WAHF.
Although the maturity date of the debt is four years away, the PIK notes have a cash coupon in 2014 that places Wind under additional pressure.
"With the first cash coupon due in July 2014 you have to ask: are you generating enough free cash flow to service this debt? If not, do you have a plan as to how do this?" said one high-yield banker.
Although investors do not expect the full separation of Wind and VimpelCom's funding to persist indefinitely, neither company has fully outlined how it intends to manage this debt burden.
On an investor call on August 7, VimpelCom's CFO Henk van Dalen confirmed that refinancing plans are underway, but refused to provide specific details, stating: "We are developing these plans but will not disclose anything like a roadmap or any specifics for the moment."
Similarly, during Wind's quarterly investor call the following day, CFO Giuseppe Gola confirmed that "there are several possible scenarios for refinancing Wind", but added that the 2017 maturities are not a pressing issue as "we have four years before we have to find the optimum solution for the refinancing of Wind inside the VimpelCom group."
Investors believe that the PIK coupon gives Wind far less than four years to get its refinancing plans in order, however.
Wind's EUR325m and USD625m 12.25% 2017 PIKs at the holdco level have so far allowed interest to accrue on the principal, but the notes become cash pay in January 2014, with the first cash coupon due on July 15 2014.
A high yield investor said that debt at the opco level does not leave enough headroom to make this payment. The investor said that when Wind's PIK bonds become cash pay, they will have accreted in value to around USD1bn and EUR450m respectively, and will require total cash interest payments of around EUR73m.
In order to service this debt, Wind is dependent on the cumulative net income build-up basket of its outstanding bonds, plus some other carve-outs. The investor said that there appears to be no room under the build-up basket, however, leaving just EUR50m left in the carve-out for the general basket.
The bond debt is not the only impediment to paying the coupon, however.
"Even if there was enough room under the bond (which looks doubtful), the tougher test is more likely to be the Permitted Payments test in the bank debt," said a credit analyst.
Although Wind's senior facility agreement is private, the analyst said that when net leverage is above either 3x or 3.5x for the restricted group there is no material ability to upstream cash to pay the PIK.
As of June 30, Wind's total net debt stood at 4.7x.
On Wind's investor call, Gola was asked whether lender approval from the bank group would be needed to upstream the cash needed to service the PIK coupon.
Gola refused to answer any specific queries about Wind's debt, however, stating that once the full picture of the Wind refinancing is clear all the other points will be addressed.
"Maybe I'm an optimist, but my guess is that their silence on the investor call is telling," said the investor.
"A refinancing might be imminent."
When asked about Wind's ability to pay its first PIK coupon, a spokesperson for VimpelCom said that they would not disclose details of Wind's debt. The spokesperson did say, however, that the company sees value in balancing the overall VimpelCom debt within the group and its subsidiaries in order to maximise savings and benefits.
"It didn't make sense to look at this optimisation until the most expensive debt of Wind, including the WAHF PIK, became callable in July 2013," the spokesperson added.
"Now we are in a position to evaluate the various options we have to generate value."
The key to optimising VimpelCom's debt lies in the in-house bank the group created earlier this year. Van Denk confirmed last week that the Luxembourg bank is now fully in place, and has already structured more than USD500m in inter-company loans.
Analysts at JP Morgan expect that depending on market conditions, "VimpelCom could decide in 2014 to refinance Wind's PIK and high yield notes in a series of transactions by issuing new VimpelCom holdco paper (ie out of the in-house bank) and then on-lending the proceeds down to Wind."
VimpelCom last tapped the bond market in February, issuing USD1bn of 10-year paper at 5.95%, USD600m of six-year paper at 5.2%, and RUB12bn of five-year paper at 9%. (Reporting by Robert Smith, editing by Sudip Roy and Julian Baker)