(The following statement was released by the rating agency)
Fitch Ratings-Singapore/Hong Kong-October 30:
Fitch Ratings has placed India-based Bharti Airtel Limited's (Bharti) 'BBB-'
Long-Term Foreign-Currency Issuer Default Rating (IDR) on Rating Watch Negative
(RWN). The agency has also placed Bharti's and Bharti Airtel International
(Netherlands) B.V's senior unsecured bonds and Network i2i's subordinated
perpetual bond's on RWN.
The RWN reflects uncertainty on the amount and timing of unpaid regulatory dues,
after India's Supreme Court ruled on 24 October in favour of the country's
Department of Telecommunication's (DoT) definition of adjusted gross revenue
(AGR). This led to DOT's demand that Bharti pay unpaid dues on licence fees of
USD3 billion. There may be another potential demand of USD2.9 billion in regard
to unpaid dues on spectrum usage charges.
The resolution of the RWN, which may take more than six months, requires clarity
on the exact amount and timing of the payment of unpaid dues and whether the
government will provide any financial relief to the telco sector affected by the
court ruling.
Key Rating Drivers
Regulatory Shock: Fitch estimates Bharti's funds from operations (FFO) adjusted
net leverage could worsen to around 3.1x-3.4x for the financial year ending
March 2020 (FY20, earlier estimate of 2.0x-2.2x) - excluding USD6.3 billion in
deferred spectrum costs - if the company had to pay entire estimated unpaid dues
of USD5.9 billion, funded out of debt. This leverage would be significantly
higher than 2.5x threshold above which Fitch would consider negative rating
action. However, Bharti may be able to partly fund the unpaid dues through a
planned stake sale of USD2.5 billion-3.5 billion in the combined Bharti Infratel
(Infratel) and Indus Tower entity, which is awaiting regulatory approval of the
merger. However, deconsolidation of Infratel-Indus would lead to cash outflow
for tower lease rentals, nullifying any significant leverage benefits.
Bharti has approached the government to seek clarity on the exact amount and
relief on the unpaid dues, out of which interest and penalties constitute about
75%. Further, Bharti may seek relief through filing a review petition in the
Supreme Court against the judgement. Management is committed to an
investment-grade rating and raised about USD5.6 billion in equity through a
rights issue and stake sales in Bharti's African subsidiary earlier in 2019.
Bharti also completed issuance of a subordinated USD750 million perpetual bond,
on which Fitch assigns 50% equity credit. Bharti will not need to pay the dues
of acquired companies Telenor India and Tata Teleservices as it is indemnified
by the respective previous owners for their dues.
Negative Sector Outlook: India's Supreme Court ruling is credit-negative for the
industry, after DOT's demand of unpaid dues on licence fees and spectrum usage
charges of at least USD19 billion from telcos. The court also ruled that telcos
are liable to pay not just the principal but also the interest and penalty
within three months of the order, dated 24 October 2019. DoT's demand for unpaid
dues pertains to a 14-year-old dispute regarding the definition of AGR, which
DoT said should include all kinds of income generated by the telcos. Typically,
telcos pay about 3%-5% of AGR as spectrum usages charges and 8% as licence fees.
Negative FCF; High Capex: Bharti's leverage is unlikely to materially improve
over Fitch's base-case due to negative free cash flow (FCF). We forecast
negative FCF in FY20 (FY19: negative INR219 billion), as cash flow from
operations of INR220 billion-245 billion will be insufficient to fund large
capex plans and moderate dividends of INR30 billion-40 billion. Barring
regulatory dues, we expect FY20 capex/revenue to remain high at 34%-37%, with
forecast capex of around USD4 billion, as Bharti continues to strengthen its 4G
network and fibre infrastructure. However, the company expects core capex, which
excludes deferred spectrum payments, to have peaked and to decline significantly
in FY20.
We expect the government to hold a 5G spectrum auction in the next 12-18 months.
However, we believe the incumbents would be unlikely to participate if they had
to pay unpaid regulatory dues in the short term.
Improving Financial Performance: Bharti's financial performance has been on an
improving trend along with an increase in average revenue per user (ARPU), which
Fitch expects to improve by 10%-15% in 2020. We forecast FY20 revenue and EBITDA
to rise by mid-single-digit percentages, driven by better ARPUs in the Indian
mobile segment and steady growth in the African and business-to-business
(enterprise) segments. Indian mobile EBITDA is likely to increase by 15%-20% on
strong data-usage growth and higher blended ARPU, as competition eases and
incumbents focus on profitability.
Bharti delayed its 2QFY20 financial results for Indian operations to 14
November, but disclosed some operating metrics. During 1QFY20, Bharti's
consolidated revenue rose by 5% yoy, while EBITDA increased by 2%, after
deducting operating lease expenses to remove the effect of accounting standard
IndAS 116 so that the figure is comparable with previous quarters, largely
driven by improving performance of its African operations, where revenue and
EBITDA grew by 7% and 13%, respectively yoy. Indian mobile EBITDA rose by 7% qoq
to INR25 billion in 1QFY20 after improving by 33% in 4QFY19. Indian mobile ARPU
remained flat at INR128 in 2QFY20 after rising by 5% qoq to INR129 in 1QFY20. 4G
subscribers increased by 8% qoq to 103 million in 2QFY20, along with qoq growth
in average data consumption by 10% to 13GB per month per user.
Strengthening African Operation: We forecast African FY20 revenue and EBITDA to
grow by a high-single-digit percentage, on a constant currency basis, driven by
steady growth in subscribers and mobile-money services, against Bharti's
forecast of double-digit percentage growth. However, there is likely to be a
small dilution in blended ARPU in the African markets due to competition. We
expect mobile money services to account for over 10% of revenue from the African
operation in FY20, from the current 8%, as the services are likely to be popular
in some under-banked markets. Bharti's market position has improved to be the
number one or strong number two mobile operator in 11 of its 14 African markets.
Airtel Africa, which reported 2QFY20 results, continued to grow and reported
revenue and EBITDA growth of 8% and 11% yoy, respectively in 1HFY20, on
subscriber growth of 10% and stable ARPU of USD2.7
Derivation Summary
Philippines' Globe Telecom, Inc's (BBB-/Stable) business risk profile is
comparable but faces significantly lower regulatory risk in the duopolistic
Philippine market. Bharti has a more diversified business profile and larger
scale, which offset weakness at its Indian mobile business segment, but our FY20
FFO adjusted net leverage forecast of 3.1x-3.4x is worse than Globe's 3.0x.
MTN Group Limited (BB+/Negative) is rated lower than Bharti because of the South
African company's weaker financial profile and deteriorating business profile
following competitive pressure, poor economic conditions, particularly in South
Africa, and a fine in its key market of Nigeria. The Negative Outlook reflects
continuing regulatory pressure in the Nigerian market as well as the change in
our Outlook on the South African sovereign's (BB+/Negative) rating. Our 2019
forecast for MTN's FFO adjusted net leverage is higher than Bharti's at 2.7x and
could breach the negative rating sensitivity of 3.0x if MTN paid the USD2
billion fine in Nigeria.
Bharti's business risk profile is comparable with that of Thailand's
third-largest telco by revenue, Total Access Communication Public Company
Limited (DTAC, BBB/Negative, Standalone Credit Profile: bbb-). The Negative
Outlook on DTAC reflects Fitch's expectation that FFO adjusted net leverage will
worsen to above 2.5x by end-2019, following a settlement payment of THB9.5
billion over its dispute with CAT Telecom Public Company Limited in early 2019.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to increase by mid-single-digit percentage in FY20, driven by stable
Indian mobile tariffs and growth in the African, home and enterprise business
segments.
- Indian mobile segment's ARPU to improve by 5%-10%.
- Operating EBITDAR margin to improve to 32%-33% (FY19: 31%) and competition
does not intensify in the Indian mobile segment.
- FY20 capex/revenue of 34%-37% to invest to strengthen its 4G networks (FY19:
40%). Capex includes spectrum payments of INR57 billion in FY20.
- 5G spectrum auction in next 12-18 months and for Bharti to make USD1 billion
in upfront payments in FY21.
- Bharti's African subscribers to increase by around 5% and ARPU to decline by
around 2% in FY20. However, the company expects ARPU to remain stable.
- Effective interest rate of 5.5%-6.0%.
- Payment of both licence fee and potential spectrum usage charge dues in FY20.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Removal of the RWN
and Affirmation of Ratings at the Current Level
- Regulatory payments lower than Fitch had expected or greater asset
monetisation along with financial performance improvements such that FFO
adjusted net leverage remains below 2.5x.
Developments That May, Individually or Collectively, Lead to Negative Rating
Action
- Immediate payment of regulatory dues or competition higher than Fitch had
expected leading to FFO adjusted net leverage above 2.5x for a sustained period.
- A downgrade of India's 'BBB-' Country Ceiling.
The RWN would be resolved on clarity of exact amount and timing of payment of
unpaid dues.
Liquidity and Debt Structure
Liquidity Hinges on Capital Access: Liquidity may come under stress, if Bharti
was to pay the entire unpaid dues in the short term. We would expect the company
to raise capital to pay such dues, taking into accounts its strong access to
Indian banks and capital markets, as evident from its issuance of USD7.3 billion
of unsecured bonds over the previous six years in US dollars, euros and Swiss
francs. At end-June 2019, Bharti's cash and equivalents of INR118 billion
(including proportionate cash of Infratel) and the USD680 million received from
the IPO of Airtel Africa were sufficient to repay short-term debt of INR155
billion.
Summary of Financial Adjustments
We have excluded USD6.3 billion of deferred spectrum costs from debt, as we
treat such costs as capital commitments. We include annual spectrum payments in
our capex forecast.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal
credit impact on the entity, either due to their nature or the way in which they
are being managed by the entity.
For more information on our ESG Relevance Scores, visit
www.fitchratings.com/esg.
Bharti Airtel Limited; Long Term Issuer Default Rating; Rating Watch On; BBB-;
RW: Neg
----senior unsecured; Long Term Rating; Rating Watch On; BBB-; RW: Neg
Bharti Airtel International (Netherlands) B.V.
----senior unsecured; Long Term Rating; Rating Watch On; BBB-; RW: Neg
Network i2i Limited
----subordinated; Long Term Rating; Rating Watch On; BB; RW: Neg
Contacts:
Primary Rating Analyst
Nitin Soni,
Director
+65 6796 7235
Fitch Ratings Singapore Pte Ltd.
One Raffles Quay #22-11, South Tower
Singapore 048583
Secondary Rating Analyst
Kelvin Ho,
Director
+852 2263 9940
Committee Chairperson
Steve Durose,
Managing Director
+61 2 8256 0307
Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email:
leslie.tan@thefitchgroup.com; Peter Hoflich, Singapore, Tel: +65 6796 7229,
Email: peter.hoflich@thefitchgroup.com; Alanis Ko, Hong Kong, Tel: +852 2263
9953, Email: alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263
9935, Email: wailun.wan@thefitchgroup.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Criteria (pub. 19 Feb 2019)
https://www.fitchratings.com/site/re/10062582
Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019)
https://www.fitchratings.com/site/re/10090792
Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)
https://www.fitchratings.com/site/re/10058988
Sector Navigators (pub. 23 Mar 2018)
https://www.fitchratings.com/site/re/10023790
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/site/pr/10099613#solicitation
Endorsement Policy
https://www.fitchratings.com/regulatory
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