Fitch Ratings has downgraded the debt ratings of Italy's Wind Telecomunicazioni with a Negative Outlook.

­The downgrade reflects Fitch's expectations that Wind will not be able to maintain stable EBITDA and free cash flow (FCF) generation in the face of mobile termination rate (MTR) cuts, intensifying competitive pressures and bleak macroeconomic prospects in Italy.

Fitch expects that Wind's leverage (as calculated by Fitch) will rise to above 5x net debt (including payments in kind(PIK))/EBITDA by end-2012 and the company will not be able to quickly de-lever to below that level. The Outlook is Negative as it will be challenging for Wind to achieve a stabilisation of its operating and financial performance and even minor additional pressures can compromise deleveraging efforts.

Wind's ratings continue to benefit from potential support from its sole ultimate shareholder, Vimpelcom, whose credit profile remains stronger than Wind's. However, Fitch cautions that Vimpelcom has not committed itself to any level of support. Fitch believes that a further rise in Wind's leverage may diminish Vimpelcom's propensity for providing a helpline to Wind.

Wind's credit profile is supported by its established position as the facilities-based number-three mobile operator in Italy, complemented by an expanding alternative fixed-line/broadband business. Wind has been able to outperform both Telecom Italia and Vodafone Group reporting stronger revenue dynamics and improving its market share at the expense of these two operators.

The company may continue outperforming its domestic peers. However, the pace of improvement is likely to slow as the company's price advantage has been significantly dented over a number of years while Wind's current tariff plans are closely matched by peers. At end-Q212 Wind's ARPU was only 7% lower vs. its closest peer Telecom Italia compared to 9% at end-Q112, 15% at end-2010 and 23% at end-2006.

MTR cuts will eat into revenues and EBITDA in 2012 and 2013. Wind guided that MTR cuts would result in a EUR250m reduction of interconnect revenues in 2012 triggering EUR60m-EUR70m of EBITDA losses. Planned 2013 MTR cuts are likely to result in similar revenue losses. Fitch no longer expects that these declines can be compensated through other initiatives. Margins will be helped by the cost cutting programme expected to start in 2013. This project envisages a 10% salary cut coupled with productivity improvements, and was supported by the trade unions and the government.

Wind's leverage was high at 4.9x net debt (including PIK debt)/EBITDA at end-2011 (Fitch defined). The agency expects this metric to rise to slightly above 5x by end-2012 while the deleveraging capacity will be compromised by regulatory and austerity headWinds, at least in 2012 and 2013. Wind is currently seeking additional waiver headroom on its leverage covenants under the bank documentation. The requested approximately 0.6x net debt/EBITDA headroom corresponds to the rise in leverage due to the 2011 LTE spectrum acquisition.

On a positive note, Wind does not face any material refinancing risks before 2017 when the bulk of its debt maturities come due. The company successfully placed a EUR500m 2018 senior secured notes tap issue in Q112 which helped it to refinance EUR250m of 2012 bank amortising facilities and repay a EUR500m bridge spectrum facility (the EUR250m portion of the latter facility was fully repaid with cash on the balance sheet in September 2012).