abc Wind Acquisitions Refinancing and trade ideas Recommendation Global Research Flashnote Refinancing options and trade ideas

Transcription

1 Flashnote Global Research European Credit Research Wind Acquisitions Refinancing options and trade ideas It s nearly crunch time for Wind as the date when its PIKtoggle notes become cash bonds is approaching Given weak cash flow, Vimpelcom s support could be needed, in our opinion, as part of a market-based solution Most upside is currently in the PIK-notes and/or through selling CDS Refinancing and trade ideas We expect Wind to be able to refinance its debt although, given weak financial performance, Vimpelcom, its owner, may need to assist. In our opinion, it would be unwise for Vimpelcom to pierce the ring-fence currently separating its creditors from Wind s, as this would expose Vimpelcom s creditors to additional risk and would be unlikely to lead to a meaningful cash interest saving for the group. Therefore, Vimpelcom s assistance may be only partial and conditional on additional refinancing of Wind debt in the market. Lior Jassur Head of Credit Research EMEA HSBC Bank plc Lior.jassur@hsbcib.com Laura Maedler Analyst HSBC Bank plc Laura.maedler@hsbcib.com View HSBC Global Research at: Issuer of report: HSBC Bank plc Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it The company s high coupon bonds are callable on any day subject to a 30 day notice, thus rendering yield and spread considerations meaningless. The company s EUR and USD 11.75% 2017 notes trade at, or near, their call price offering no upside potential, but the PIK-toggle notes offer a 3 point upside potential from current prices, thus we assign a BUY trading call to the company s 12.25% PIK-toggle notes. If the company refinances its expensive debt, we expect Wind s 5 year CDS, currently around 540bp, to tighten towards the mid-to-low 400bp on reduced refinancing risk; thus, for investors that prefer to stay at the senior unsecured level, we recommend selling 5 year CDS at 540bp or wider. Recommendation We reiterate an Underweight fundamental recommendation on Wind, as the challenging conditions in the Italian economy are likely to place significant pressures on the company (and other companies), as has been the case in other European countries recently. As a result of these pressures, top-line growth is likely to be negligible and de-leveraging is likely to remain elusive. The company, a major alternative telecom operator in Italy, was acquired by Vimpelcom in 2011 and, although we analyse Wind on a standalone basis, we view Vimpelcom s ownership as a credit positive. In recent years, Wind s net cash flow before financing has been weak and it is unlikely, in our view, to improve meaningfully in the near future, placing pressure on the sustainability of the company s capital structure. Upside risks include: (i) improved performance as the company gains market share at the expense of others; (ii) stabilisation of the economic situation in Italy; (iii) explicit financial support for the company from its parent; and (iv) lower competition after consolidation in the market. We acknowledge the assistance of Benjamin Walker (HSBC Bank plc) in the production of this report.

2 Pressure to refinance Wind Acquisition s capital structure was put together prior to its acquisition by Vimpelcom in 2011 (Figure 1); its PIK-toggle bonds and 11.75% senior unsecured notes were issued in July 2009 and are now within their call period. The amount of debt, and the high coupon the bonds carry, mean that a significant amount of Wind s cash flow is used up in debt service. In recent quarters, the company s cash flow before financing has been very thin, leaving virtually no free cash to finance the PIK s coupons, dividends to the parent or debt reduction, as can be seen in Table 1: Table 1: Wind Acquisition's cash flow over time (EURm) Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Op cash flow excl. interest expense Cash interest expense (212) (169) (188) (152) (230) (151) (222) (180) (205) (164) Cash capex, net (146) (136) (223) (1,534) (192) (240) (219) (340) (162) (182) Free cash flow before financing (1,058) (3) 29 Source: Company data, HSBC calculations Once the group s PIK-toggle bonds, which have a 12.25% coupon, become cash pay in January 2014, we estimate they will add a further EUR153m to Wind s annual cash interest expense, raising it from EUR771m LTM to Q to EUR924m in FY2014. Based on the company s recent cash flow generation as shown in Table 1, even if it were possible to upstream cash to the PIK-issuer, it seems there is not enough cash being generated to upstream. The PIK-toggle bonds are in a very weak position and Wind, as well as its parent Vimpelcom, needs to address its capital structure as a matter of some urgency. Refinancing options Assuming that operating cash flow excluding interest expense cannot be improved rapidly, the focus of any refinancing at Wind needs to be, in our opinion, on cutting cash interest expense and extending debt maturity. An obstacle to taking such steps is the complex structure of the company (see Figure 1) and the restrictions on up-streaming cash between the different holding companies in the structure. On its Q earnings conference call, Vimpelcom s outgoing CFO noted that Wind s peak debt maturity is in 2017 and stated that the plan is to refinance this debt before maturity and that an inhouse bank (i.e. financing subsidiary) based in Luxembourg is now in place through which Vimpelcom structured around USD m of inter-company loans although the plans for the future are still in the development stage. Whilst we view refinancing of Wind s debt through Vimpelcom as a credit positive event for Wind creditors, it is not clear to us that this will be a necessarily positive event for Vimpelcom itself. In this section we highlight possible options and rank them according to whether they favour Wind creditors, Vimpelcom creditors, or both. Full refinancing through Vimpelcom Positive for Wind creditors, Negative for Vimpelcom creditors Wind s total debt is around USD14.1bn, out of Vimpelcom s total debt of USD27.4bn in other words Wind accounts for 51% of Vimpelcom s total debt. The current financing structure of Vimpelcom, as shown in Figure 1, means that Vimpelcom s creditors are not exposed to Wind s credit risk. According to our interpretation of Vimpelcom s and Wind s capital structure, if Wind were to encounter liquidity difficulties, its creditors have no claim on Vimpelcom s assets outside the ring-fenced group therefore 2

3 the current structure affords some protection to Vimpelcom s creditors from Wind s credit risk. This is reflected in Vimpelcom s senior unsecured bond rating of Ba3 / BB, compared with Wind s senior unsecured bond rating of B3, Negative Outlook / B. By bringing Wind s credit risk into the Vimpelcom capital structure without ring-fencing, Vimplecom risks a higher cost of debt in the future: Wind s current cost of debt, when including the PIK-toggle bonds is around 8.9%. We estimate Vimplecom s cost of debt, excluding Wind, to be around 7.9% (USD13.3bn gross debt and annualised cash interest expense of USD1.05bn). As Wind accounts for approximately half of Vimplecom s consolidated debt, combining all debt together would result in an estimated cost of 8.4% a small saving for Wind of around USD89m cash interest expense per year, and a similar increase in cash interest expense for Vimpelcom excluding Wind. Refinancing Wind on a stand-alone basis Neutral for Wind creditors, Positive for Vimpelcom creditors A piecemeal refinancing of Wind s debt, without recourse to Vimpelcom, would provide a solution to Wind s problems without exposing Vimpelcom s creditors to additional risks. Furthermore, if free cash flow can be improved through refinancing Wind s debt at lower costs on a stand-alone basis then Vimpelcom, as owner, would benefit from a more stable subsidiary with better prospects of deleveraging over time. At the time of writing, Wind s EUR 7.375% 2018 senior secured bonds are trading at a yield to maturity of around 6.7%. Adding 300bp for senior unsecured bonds and 450bp for subordinated bonds (to refinance existing PIK-toggle notes) would reduce cash interest expense by around EUR70m and achieve debt maturity extension. Reducing Wind s cash interest expense by EUR70m, assuming operating cash flow remains stable, would leave around EUR1.1bn of cash flow to cover capex and reduce debt. Partial refinancing through Vimpelcom Neutral/Negative for Wind creditors, Positive for Vimpelcom creditors As owner of Wind, Vimpelcom needs to ensure that its position in the company is protected if Wind s capital structure becomes unsustainable in the future. Vimpelcom could use its Luxembourg financing subsidiary to extend a senior secured loan to Wind. This could reduce Wind s cash interest expense and improve its free cash flow if done in conjunction with refinancing in the market (i.e. without Vimpelcom s money) of Wind s 11.75% and 12.25% bonds. In such a scenario, if Wind encountered financial difficulties in the future, Vimpelcom would rank ahead of senior unsecured creditors through its loan to Wind; if Wind were able to embark on a virtuous cycle of debt refinancing and de-leveraging, then Vimpelcom, as shareholder, would be able to extract value, having protected its position against a downside scenario. Conclusion Given the potential risks to Vimpelcom, and the relatively small benefit in terms of interest expense for Wind, we view the option of financing Wind entirely through Vimpelcom s financing subsidiary as unattractive. A stand-alone refinancing appears to be the one more favourable for Vimpelcom although it may be difficult to achieve given Wind s recent weak performance. Therefore, we view a partial refinancing through Vimpelcom as the most likely scenario for Wind. 3

4 Figure 1: Wind within Vimpelcom's capital structure VimpelCom Ltd. Vimpelcom Amsterdam Finance B.V. VimpelCom Amsterdam B.V USD 2.7bn intercompany loan VimpelCom Holdings BV OJSC VimpelCom PJSC Kyivstar Total OJSC Group USD 8.2bn VIP NL USD 4.2bn WIND Telecom S.p.A Weather Capital S.a.r.l Wind Acquisition Holdings Finance S.p.A. USD 2.7bn shareholder loan (PIK) Weather Capital Special Purpose I S.A. Orascom Telecom Holding S.A.E WIND Telecomunicazioni S.p.A. Wind Acquisition Holdings Finance SA EUR392m 12.25% PIK/Toggle Notes 2017 USD754m 12.25% PIK/Toggle Notes 2017 EUR400m L+400bp Snr Secured RCF 2016 EUR37m L+400bp Snr Secured TL A EUR303m L+400bp Snr Secured TL A EUR1,334m L+425bp Snr Secured TL B EUR681m L+450bp Snr Secured TL B USD 2.5bn uncommitted credit facility (PIK) USD 0.7bn drawn OTH subsidiaries USD 0.9bn Wind Acquisition Finance SA Ring fenced EUR1,750m 7.375% Snr Secured Notes 2018 EUR200m 7.375% Snr Secured Notes 2018 USD1,300m 7.25% Snr Secured Notes 2018 USD400m 7.25% Snr Secured Notes 2018 EUR150m E+525bp Snr Secured Notes 2019 USD550m 6.50% Snr Secured Notes 2020 EUR1,250m 11.75% Snr Unsecured Notes 2017 USD2,000m 11.75% Snr Unsecured Notes 2017 Source: Company data, HSBC 4

5 Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Lior Jassur and Laura Maedler Credit: Basis for financial analysis This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations. HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its credit research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a six-month time horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its longterm investment opportunities, as described below. HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice. HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance. Definitions for fundamental credit recommendations Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six months Prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds and CDS relative to the relevant iboxx/itraxx indices over a 3-month horizon. 5

6 Rating changes for long-term investment opportunities Recommendation History of WIND ACQUISITIONS FINANCE SA From To Date Neutral Underweight Overweight Neutral Not Rated Overweight Source: HSBC Distribution of fundamental credit opinions As of 21 August 2013, the distribution of all credit opinions published is as follows: All Covered Companies Companies where HSBC has provided Investment Banking in the past 12 months Count Percentage Count Percentage Overweight Neutral Underweight Source: HSBC HSBC & Analyst disclosures Disclosure checklist Company Ticker Recent price Price Date Disclosure WIND ACQUISITIONS FINANCE SA Source: HSBC 1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 July 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 June 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 June 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 June 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-us Market Maker in securities issued by this company and/or in securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at 6

7 * HSBC Legal Entities are listed in the Disclaimer below. Additional disclosures 1 This report is dated as at. 2 All market data included in this report are dated as at close 21 August 2013, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 7

8 Disclaimer * Legal entities as at 8 August 2012 UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR Issuer of report HSBC Bank plc 8 Canada Square, London E14 5HQ, United Kingdom Telephone: Fax: Website: This document is issued and approved in the United Kingdom by HSBC Bank plc for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN , AFSL ) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No ). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. The document is distributed in Hong Kong by The Hongkong and Shanghai Banking Corporation Limited and in Japan by HSBC Securities (Japan) Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act ( FSCMA ). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. Each of the companies listed above (the Participating Companies ) is a member of the HSBC Group of Companies, any member of which may trade for its own account as Principal, may have underwritten an issue within the last 36 months or, together with its Directors, officers and employees, may have a long or short position in securities or instruments or in any related instrument mentioned in the document. Brokerage or fees may be earned by the Participating Companies or persons associated with them in respect of any business transacted by them in all or any of the securities or instruments referred to in this document. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. The information in this document is derived from sources the Participating Companies believe to be reliable but which have not been independently verified. The Participating Companies make no guarantee of its accuracy and completeness and are not responsible for errors of transmission of factual or analytical data, nor shall the Participating Companies be liable for damages arising out of any person s reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgement of the Participating Companies, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. This document is intended for the use of institutional and professional customers and is not intended for the use of private customers of the Participating Companies. This document is intended for distribution in the United States solely to major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934 and may not be furnished to any other person in the United States. Each major US institutional investor that receives this document by such act agrees that it shall not distribute or provide a copy of the document to any other person. Such recipient should note that any transactions effected on their behalf will be undertaken through HSBC Securities (USA) Inc. in the United States. Note, however, that HSBC Securities (USA) Inc. is not distributing this report, has not contributed to or participated in its preparation, and does not take responsibility for its contents. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) ( SFA ) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. HSBC Bank plc is registered in England No 14259, is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. (070905) In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed Commentary in Canada although other affiliate jurisdictions may term Commentary as either macro-research or research ), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). Copyright 2013, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 110/01/2013 8