OREANDA-NEWS. Fitch Ratings has assigned GTH Finance B.V.'s proposed bond an expected 'BB+(EXP)' rating. The bond will be guaranteed by VimpelCom Holdings B.V. The expected rating is in line with the group's ultimate parent, VimpelCom Ltd.'s (VimpelCom) Issuer Default Rating (IDR). The final rating is contingent upon the receipt of final documents conforming to information already received.

The proposed bond is effectively structured as a senior unsecured obligation of VimpelCom Holdings B.V., which is an intermediary holding company within Vimpelcom group and the group's main issuer of public debt.

VimpelCom is a geographically diversified mobile-focused telecoms operator controlling the seventh-largest global subscriber base of approximately 217 million including Italy. Russian/CIS operations are a core cash generating unit for the group, with less significant cash flows from Global Telecom Holding S.A.E. (GTH), a 52% owned subsidiary with operations in Pakistan, Bangladesh and Algeria, and Wind Telecomunicazioni SpA (Wind; B+/Stable), which is highly leveraged but ring-fenced and Italy's third-largest mobile company. VimpelCom's leverage is moderate and we expect this to reduce in the next three years. However, there is a significant currency mismatch as over 70% of its gross debt is in US dollars.

KEY RATING DRIVERS
Strong Russian Operations
VimpelCom is the third-largest mobile telecoms operator in Russia with 22% service revenue and a high 24% subscriber market share. We expect that the company will remain a strong mobile player in the country. Although its market share has been steadily declining over the three years to 2014, a catch-up in capex should allow it to compete on a more level playing field with its larger peers. In the three years to December 2014, VimpelCom invested 15% more capex in Russia than Megafon (BB+/Stable), a key rival.

Rational Competition In Russia To Continue
The Russian market is strongly competitive, with four national facilities-based mobile operators. However, the 2014 merger of Rostelecom's and Tele2 Russia's mobile assets into new company, LLC T2 RTK Holding (B+/Stable), reduced disruptive pressures in many regions. While the new operator is targeting a higher market share, the market focus is likely to be on service quality with contained price competition in key areas, including Moscow.

Russia To Remain Core Cash Flow Contributor
VimpelCom's Russian operations are likely to remain highly profitable, with improving contribution to free cash flow (FCF), driven by the end of the catch-up investments and future capex synergies on the back of a network sharing agreement with MTS (BB+/Stable), the largest mobile operator in Russia. The large absolute size of the Russian franchise with 59 million subscribers is sufficient to maintain stable and strong EBITDA margins in the range of up to 40%, in our view.

Low Cash Flows From GTH
We believe GTH, VimpelCom's 52%-owned holding company controlling fully-owned mobile operating subsidiaries in Pakistan and Bangladesh and a 46%-owned subsidiary in Algeria, will retain strong strategic ties with the parent. Cash flows from GTH to VimpelCom are likely to remain insignificant in absolute terms as GTH is investing to support growth of its operations and deleveraging.

Modest Diversification Benefits
Operations outside Russia provide a degree of diversification for the group. However, the positive impact is modest as all these operations are based in emerging markets. In many of these countries the operating and the regulatory environment is difficult, reflected by their low sovereign ratings.

Wind Is Ring-Fenced
Wind, VimpelCom's 100%-owned third-largest mobile operator in Italy, is highly leveraged but is ring-fenced. Wind's debt is non-recourse to VimpelCom and Wind's default on its obligations will not trigger a cross-default on VimpelCom's debt. Fitch therefore deconsolidates this subsidiary from VimpelCom group results and leverage metrics.

In our view, VimpelCom cannot reasonably expect any cash flows from this subsidiary in the short to medium term as Wind will remain focused on deleveraging. Any dividend distributions are currently restricted under the terms of its loan and bond documentation until leverage significantly abates.

Positive FCF Generation
We expect VimpelCom to maintain positive FCF generation. EBITDA margins in Russia may come under modest pressure due to increasing competition, but stronger margins are likely at GTH. Capex will start declining from 2016 as the major phase of 4G/3G roll-out will be largely completed. Cash flows will be supported by low dividends. VimpelCom guided that its shareholder pay-outs would remain low until the group's leverage drops to below 2x net debt/EBITDA. Although this goal looks achievable if the Wind/3i merger goes through, this is unlikely before the transaction closes, which company expects to be around end-2016.

Moderate Leverage, Sufficient Liquidity
We expect VimpelCom's leverage to remain moderate, at below 2.25x net debt/EBITDA. This leverage metric is calculated with Wind and the Algerian subsidiary deconsolidated but potentially including regular dividends from these entities into group EBITDA (Wind is unlikely to disburse any dividends in the near-to-medium term, we expect the Algerian subsidiary to start paying dividends from 2016).

Further significant FX pressure, although not out of the question, looks less likely now as we believe that the brunt of depreciation has already taken place. However, FX risks remain significant, with the proportion of dollar-denominated debt at above 70% of the group's total (excluding Wind). This is partially mitigated by a significant share of cash also held in USD.

Corporate Governance A Drag
Fitch applies a two-notch discount for corporate governance, which it views as average for large Russian private-owned companies. This discount reflects both Russian governance weaknesses and the issuer-specific situation, driven by major shareholder risk. LetterOne, VimpelCom's largest shareholder with a 56% economic interest stake and a 48% voting stake, is a non-transparent investment company reported to be ultimately owned by a few Russian individuals. Its influence on the company is likely to increase after the other large shareholder, Telenor, took a strategic decision to divest of its 33% economic stake in VimpelCom. VimpelCom's predominant exposure to emerging markets makes corporate governance risks part of the company's risk profile.

No Subordination for PJSC-guaranteed Debt
We rate VimpelCom's parent company debt at the same level as debt issued by Vimpel-Communications PJSC (PJSC). This is because the amount of prior-ranking debt at PJSC, the strongest operating entity within the group, is below 2x of group's EBITDA and VimpelCom intends to discontinue relying on PJSC's guarantees for issuing holdco debt. We expect that the amount of prior-ranking debt guaranteed or directly issued by PJSC will keep declining. PJSC consolidates Russian operations and some other Eurasian assets including in Kazakhstan, Uzbekistan, Kyrgizstan, Georgia and Armenia, and is the core cash generating unit within the VimpelCom group.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Improvements in corporate governance, likely driven by a higher ring-fence protecting from potential negative influence of the dominant shareholder.
- Stronger diversification leading to sustainably more robust FCF generation.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Hindrances to cash flow circulation across the key subsidiaries, most importantly in Russia.
- Significant operating pressures leading to lower cash flow generation.
- A sustained rise in Fitch-defined net debt/EBITDA to above 2.25x, with Wind and the Algerian operations deconsolidated but reflecting regular dividends from these entities in EBITDA.