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March 13 (The following statement was released by the rating agency)
Fitch Ratings has assigned Bharti Airtel International (Netherlands) B.V's proposed Swiss franc 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 EUR1bn due 2018 and USD1.5bn due 2023. The notes will rank pari passu with the issuer's existing and future senior unsecured indebtedness
KEY RATING DRIVERS
Leverage to Improve: Bharti's funds flow from operations (FFO)-adjusted net leverage will improve to 2.6x-2.7x in the financial year ending March 2014 (FY14) from 3.0x in FY13 following an equity injection of USD1.3bn from Qatar Foundation Endowment. This, along with free cash flow (FCF) generation, will more than offset the addition of debt stemming from the acquisition of Qualcomm's spectrum for USD1bn and the increase in leverage by 0.15x-0.2x due to the 13% depreciation of the rupee during 1HFY14.
Sustained Profitability: We expect Bharti's FY14 operating EBITDAR margin to remain resilient at 31% (FY13: 30.9%) as the competitive landscape for its Indian operations improves and the company gains market share in its African operations. Fitch expects the profitability of its Indian operations will improve as industry overcapacity falls following the exit or contraction by smaller operators.
The profitability of its African operations will improve gradually (1HFY14 operating EBIDTAR margin: 26.7%), benefiting from rising economies of scale on a growing subscriber base and traffic minutes. In addition, Bharti's profitability will improve due to the narrowing of the tariff differential between off-net and on-net calls following a cut in mobile termination rates in key African markets.
FCF to Fund Regulatory Costs: Fitch believes that Bharti's regulatory payments are manageable given its ability to generate at least USD700m-800m in annual FCF. Regulatory risk has reduced, as evidenced by a lower required price to obtain the pan-India spectrum during regulatory auctions in February 2014 and the introduction of a flexible payment mechanism for regulatory payments. The Indian government now provides an option for regulatory payments to be phased over the life of the licence, instead of upfront lump sums previously.
Capex Could Rise: Fitch believes that capex could rise over FY15-FY16 as data traffic grows significantly in its Indian operations. Indian telcos' average capex/revenue ratio of 15%-17% is much lower than that for their Chinese and Indonesian peers, which invest over 20% of their revenue. This is even though Indian telcos face a greater shortage of spectrum compared with their Asian peers. Bharti's FY14 capex guidance is USD2.1bn-2.2bn (15%-16% of FY14 revenue) of which the company invested USD1.2bn during 9MFY14.
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
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.
As Bharti's ratings are not constrained by the Country Ceiling, an upgrade in the Country Ceiling will not lead to an automatic upgrade of Bharti's ratings.