Russian Billionaire’s Wind PIK Exit Expedited by Draghi

Russian billionaire Mikhail Fridman is getting some help from European Central Bank Chairman Mario Draghi in his efforts to salvage VimpelCom Ltd.’s investment in Italian mobile-phone service Wind Telecomunicazioni SpA.

The record-low borrowing costs engineered by Draghi are allowing the company owned by Fridman’s VimpelCom to refinance securities, whose outstanding amount increased by 70 percent since issue, with junk bonds carrying lower interest rates. That’s the central part of a broader plan that Wind says will save it 200 million euros ($275 million) in annual interest costs on its more than 10 billion euros of debt.

The company, which accounts for more than half of VimpelCom’s borrowings, is combating falling earnings and sales after the Italian economy contracted 1.9 percent last year and phone companies engaged in a price war. Rome-based Wind is meeting investors in London today to outline its plan, which calls for VimpelCom to inject 500 million euros into the unit.

“With the refinancing, Wind will be a stronger credit with stable cash flows, instead of potentially going backwards,” said Clark Nicholls, the head of high-yield research at Spread Research in London. “Wind’s cash flow would have been under pressure without a refinancing” of the payment-in-kind bonds.

Those 12.25 percent PIK notes that Italy’s third-largest mobile operator sold in 2009 ballooned to more than $1.7 billion as the debt allowed the company to pay interest in additional bonds rather than cash.

Crimea Effect

The plan to refinance Wind’s debt comes as VimpelCom struggles to cut its debt pile and after Russia’s annexation of Crimea caused its borrowing costs to soar last month.

Yields on $1 billion of 5.95 percent dollar-denominated bonds due in February 2023 issued by VimpelCom, Russia’s most-indebted telecommunications company, jumped as high as 8.33 percent last month as the country’s incursion into Ukraine sparked the worst standoff with the U.S. since the end of the Cold War. Wind’s yields also rose in March before retreating.

Wind is now marketing 1.85 billion euros of seven-year notes to yield 7 percent and $2.6 billion of bonds with the same maturity to yield 7.375 percent, according to a person familiar with the offering, who asked not to be identified because they’re not authorized to speak about it. The securities will be issued through its Wind Acquisition Finance SA unit.

Borrowing Costs

The corporate bond market in Europe had its busiest quarter in two years in the January through March period as companies took advantage of record-low borrowing costs to raise more than 270 billion euros of securities. Yields on speculative-grade company debt fell to an all-time low of 4.24 percent yesterday, according to the Bank of America Merrill Lynch Euro High Yield EU members & Western Europe Issuers Index.

Company borrowing costs tracked those for governments lower after Draghi said in July 2012 he was “ready to do whatever it takes” to preserve the after the region’s sovereign debt crisis sent bond yields soaring and speculation that some members may leave the common on currency. Italy’s 10-year yields dropped to

3.14 percent yesterday from almost 7.5 percent in November 2011, according to data compiled by Bloomberg.

Italy, the euro region’s third-biggest economy, expanded

0.1 percent in the three months through December, marking the first gain after more than two years of economic contraction, the nation’s longest recession on record.

Wind Purchase

Fridman, 49, bought Wind from Egyptian billionaire Naguib Sawiris in a deal valued at $21.9 billion in April 2011 through VimpelCom, which operates in more than a dozen markets and gets 39 percent of its sales in Russia as the country’s third-largest mobile-phone carrier. Based in Amsterdam, VimpelCom last month reported a fourth-quarter loss after writing down its Ukraine assets by $2.1 billion because of the country’s political turmoil.

VimpelCom’s American depositary receipts have plunged 35 percent this year, helping to wipe out 9.3 percent of Fridman’s personal fortune, which is now valued at $14.6 billion, according to the Bloomberg Billionaires Index. In addition to Fridman’s controlling stake in VimpelCom, he also owns OAO Alfa Bank, Russia’s biggest non-state lender.

Bobby Leach, a spokesman for VimpelCom in Amsterdam, declined to comment on the refinancing.

‘Constructive Step’

Wind is rated B1, four levels below investment grade, at Moody’s Investors Service and one level higher at BB- by both Standard & Poor’s and Fitch Ratings.

“The anticipated refinancing of part of Wind Italy’s debt is a constructive step for VimpelCom’s consolidated profile in that over time it should facilitate deleveraging and improve consolidated cash flow generation,” according to a Moody’s report on March 25.

Wind reported a drop in sales last year, to 4.98 billion euros, citing a price war between the market’s biggest operators and lower network connection fees. Earnings before interest, tax, depreciation and amortization fell 6 percent to 1.94 billion euros.

The company is outperforming other mobile operators, with its market share increasing to 24.3 percent in 2013 from 23.3 percent the year before. Vodafone Group Plc’s fell to 31 percent from 31.7 while Telecom Italia Mobile’s fell to 34.1 percent from 34.7, according to statement from Wind last month.

PIK Growth

The amount outstanding of Wind’s euro-denominated PIK bonds has grown to 528 million euros from an original issue of 325 million euros, Bloomberg data show. The notes climbed to 105.9 cents from 98.65 cents last month and can be bought back at

106.1 cents in May.

The securities in dollars grew to $1 billion from $625 million initially sold. Those notes, which can also be bought back at 106.1 cents, rose to 106.03 cents from 98.5 last month.

Wind’s 1.25 billion euros of 11.75 percent notes maturing in July 2017 are trading at 105.81 cents on the euro, in line with its 105.88 cent call price.

Credit-default swaps insuring against losses on Wind debt rose to a five-month high of 395 basis points yesterday and have increased the most among 60 companies in the Markit iTraxx Crossover Index since the start of the year.

A total of 2,607 contracts covering a net $647.5 million of Wind’s debt were outstanding as of March 28 and 191 contracts covering a gross $692 million traded that week, according to the Depository Trust & Clearing Corp.

“We see Wind as having sufficient financial and operational flexibility to show some signs of stabilizing operational performance in 2014,” Mark Chapman, an analyst at CreditSights Inc. in London wrote in a note. “Achieving revenue growth will likely need both market repair in Italy overall and for Wind to maintain a competitive edge versus its peers.”

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