(Repeat for additional subscribers)
May 12 (The following statement was released by the rating agency)
Fitch Ratings has assigned Bharti Airtel International (Netherlands) B.V's proposed Euro senior unsecured notes an expected rating of 'BBB-(EXP)'. The notes will be unconditionally and irrevocably guaranteed by India's Bharti Airtel Limited (Bharti; BBB-/Stable) and are therefore rated at the same level as Bharti's foreign-currency senior unsecured rating of 'BBB-'. The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received.
Bharti will use the entire proceeds of the notes to refinance its existing debt. The terms and conditions of the proposed bond are identical to Bharti's existing guaranteed bonds of USD1.5bn due 2023, EUR1.5bn due 2018 and CHF350m due 2020.
The notes will rank pari passu with the issuer's existing and future senior unsecured indebtedness. The announcement of these proposed notes follows an earlier announcement today of proposed US dollar notes to which Fitch has already assigned an expected rating of 'BBB-(EXP)'.
KEY RATING DRIVERS
Low Ratings Headroom: Bharti's 'BBB-' ratings would not be able to withstand significant debt-funded acquisitions or higher-than-expected regulatory costs as its funds flow from operations (FFO)-adjusted net leverage will be around 2.3x-2.5x for the financial year ending March 2015 (FY14: 2.5x, excluding unpaid spectrum costs) - close to 2.5x, the level above which Fitch may consider negative rating action. Nevertheless, Fitch expects Bharti to generate at least INR35bn-40bn (USD580m-670m) in free cash flow (FCF) - despite higher capex/revenue of 18%-19% - as competition eases in its Indian operations and margins stabilise in its African operations.
Resilient Indian Profitability: We expect FY15 EBITDA margin to be stable at 31%-32% (FY14: 32.3%) as the top four Indian telcos increase voice realisation per minute by reducing discounts and free minutes. The February 2014 spectrum auctions should hasten industry consolidation, strengthen tariffs and reduce regulatory risks. In the medium term, we expect the bottom six telcos to exit the industry as they lack sufficient spectrum and financial resources to remain viable. During FY14, Bharti's leverage improved mainly due to higher EBITDA margin at its Indian operations, which increased to 35.7% from 32.5%.
African Operations Continue to Struggle: We expect Bharti to continue to struggle to improve its African EBITDA margin (FY13-14: 26%) as a low usage elasticity, high cost structure and largely on-net voice traffic favour larger incumbent operators. Bharti, however, has gained ground and is now the second-largest operator by subscribers in Nigeria, which accounts for about a third of its African revenue and EBITDA. Profitability will rise only gradually as usage grows and the tariff differential between off-net and on-net calls narrows following a cut in mobile termination rates in some African markets.
Capex Could Surprise: FY15-FY16 capex could rise more than Bharti's guidance of USD2bn-2.2bn (15%-16% of revenue) because fast-growing data services may need additional investment and African capex could rise as its peers invest more. During FY14, Bharti invested 20.9% of its revenue, including INR110bn in capex and INR55bn in spectrum acquisitions.
Acquisitive Nature: Bharti's credit profile is exposed to the risk of further spectrum-led and expansionary acquisitions in India and Africa. The equity injection of USD1.3bn from Qatar Foundation Endowment in FY14 was used on acquisitions - two in Africa and one in Mumbai - and to offset increased debt on consolidation of Qualcomm's subsidiaries holding 2300MHz spectrum in four Indian zones. However, we expect Bharti to follow its stated strategy to repay debt and keep its leverage below 2.5x.
Solid Access to Capital: Bharti will need to refinance a part of its short-term debt as its cash and equivalents of INR149bn (USD2.5bn) at end-March 2014, fell short of the INR209bn (USD3.5bn) of debt maturing in the subsequent 12 months.
Its access to capital is adequate as demonstrated in FY14 when it tapped capital markets four times and raised an aggregate of USD2.3bn. Bharti remains exposed to depreciation in the Indian rupee as it holds over 80% of its debt in non-rupee currencies. During FY14, its leverage was negatively affected because the rupee depreciated by more than 10%.
Negative: Future developments that could individually or collectively lead to negative rating actions include
- A higher-than-expected regulatory charge or M&A activity resulting in FFO-adjusted net leverage remaining above 2.5x on a sustained basis.
- A downgrade of India's 'BBB-' Country Ceiling
- Negative free cash flows on a sustained basis.
Positive: Given the company's business profile and investment needs, Fitch currently does not envisage any upgrade to Bharti's ratings in the medium term. Bharti's ratings are not constrained by India's Country Ceiling, so an upgrade in the Country Ceiling will not necessarily lead to an upgrade of Bharti's ratings.