3 IN. DI LETTURA
* PIK falls on fear senior notes to be refinanced first
* VimpelCom refuses to comment but mkt panic subsides
* Senior note refi could give firm more freedom
By Robert Smith
LONDON, Sept 17 (IFR) - Italian telecom Wind's payment-in-kind (PIK) bonds briefly plummeted Tuesday on worries that the company's Russian owners would use a new loan to service other debt first.
Nervous investors sold off the nearly USD1bn in Wind's PIK toggle bonds, which dropped almost five points to 100.8 in the secondary market before bouncing back to 103.
Russia's VimpelCom declined to comment on reports that an anticipated USD4bn-equivalent loan facility would be used to repay Wind's 11.75% EUR2.7bn-equivalent 2017 senior notes instead of the PIKs.
"Everyone just assumed the proceeds would be applied to the PIK," said one high-yield investor. "There was immediate panic."
Market participants do not believe Wind's debt structure will allow it pay the first cash coupon on its PIK notes, which is due in July 2014.
Its EUR325m and USD625m 12.25% 2017 PIKs at the holding company level have 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.
By that time, the coupons will have accreted to around USD1bn and EUR450m in size - and would require total cash interest payments of around EUR73m-equivalent.
Sources say Wind cannot upstream the cash to pay that coupon under its senior secured bond covenants or its senior facility agreement - making a PIK refinancing highly likely.
The investor said there were a number of reasons why VimpelCom should tackle the senior notes before the PIKs.
If VimpelCom repays the Wind PIK using cash - instead of replacing it with a similar piece of capital - this would free the dividend stream from the Wind operating company level up to the VimpelCom level, the investor said.
"If VimpelCom is considering refinancing the PIKs with a debt instrument, it makes sense to determine what they can afford in terms of the most junior part of the capital structure." (Reporting by Robert Smith, additional reporting by Claire Ruckin; editing by Natalie Harrison, Marc Carnegie)