(The following statement was released by the rating agency)
SYDNEY, March 19 (Fitch) Fitch Ratings says that ongoing decline
telcos' margins could result in rating downgrades, and that the
gap in credit
strength between the top four and the smaller operators in
Indonesia is likely
to widen. In India, regulatory pressures remain on Bharti Airtel
(BBB-/Negative), albeit softening, and that in China, Baidu,
ownership structure is stronger than some other variable
interest equity (VIE)
arrangements. These were among the key points Fitch made at
meetings with credit investors based in Hong Kong and Singapore.
feedback to investors' key questions is set out below.
Q: What is your view on the Korean telecom sector, why is SK
A-/Stable) rated a notch below KT Corporation (KT, A/Stable),
and how does Fitch
view KT's interest in Maroc Telecom?
In the last 5-10 years we have seen many European telcos migrate
mid-'A' category to the 'BBB' category. Given the level of
margin decline in Korea, there is a risk that this market may go
the same way as
some of those European markets. Currently rating headroom for
the Korean telcos
We downgraded SKT to one notch below KT following its
acquisition of Hynix
Semiconductor (SK Hynix, BB/Stable), not only because credit
but also because we thought that the acquisition was a poor
strategic fit and
that the risk of another creditor-unfriendly deal has increased.
Any deal KT does to acquire a stake in Maroc Telecom will weaken
profile. However, Fitch is treating this potential acquisition
as event risk.
That is, if the deal proceeds, the extent of any downgrade, if
any, will depend
on the details of the transaction, including financing. However
headroom is currently low.
Q: What is your view on the Indian telecommunications sector,
and why do you
rate Bharti investment-grade?
We have had a negative outlook on this sector for a number of
years now. India
has been the toughest major telecoms market in the region for
both operators and
investors due to a high level of competition leading to low
prices and an
unstable regulatory and legislative framework.
Bharti's 'BBB-' rating reflects its leading position in the
Indian market and a
likely winner in the medium term. The Negative Outlook continues
ongoing regulatory uncertainty in its Indian operations relating
to a one-time
charge for excess spectrum (over 6.2MHz) and spectrum refarming.
charges are now likely to be phased over the life of the
licence, rather than
paid up-front, which will aid Bharti's deleveraging efforts.
by smaller telcos are likely to lead to some exiting the market
or scaling back
operations which we expect to strengthen the larger operators'
While Bharti's African operations are developing slower than the
initial expectations, their position as the number two player in
markets and number one in smaller markets provides a platform
for this business.
The geographical diversification to some extent mitigates the
Q: What is happening in the South-East Asia telecoms markets?
Not all SE Asian markets are the same. In Singapore and the
Philippines we are
expecting margins to decline this year, but leverage should
improve as capex is
likely to be lower than in 2012 in both countries. In Malaysia
most telcos are
likely to maintain their operating EBITDAR margins this year due
to stable voice
tariffs and rising data revenue. Malaysian wireless telcos' free
cash flow (FCF)
margins will remain robust as capex will stay low.
In Indonesia, the dominant top four operators will generate
adequate cash from
operations (CFO) to support continued high capex. For 2013 these
revenue will rise by the mid-single digits, and operating
EBITDAR margins will
remain above 50%. Smaller telcos will continue to be weak amid
tariffs, low profitability and stretched balance sheets.
Fitch is positive on the credit outlook for the Thai telecom
sector based on our
expectation that the operators will be less exposed to policy
risks following the issuance of 3G licences. Technology upgrades
to 3G should
also support growth in non-voice revenue, given an improvement
in data network
quality. Credit metrics may deteriorate due to high capex and
licence fees, but
we believe the two largest mobile operators, Advanced Info
Company Limited (BBB+/Stable) and Total Access Communication
Limited (BBB-/Positive), have sufficient headroom in their
Q: Why do you rate Baidu at 'A'? Is Baidu's VIE mechanism not a
risk and how
does Fitch look at these structures?
Baidu's leading position in the Chinese internet search market
will enable it to
generate strong cash flows even if its market share and margins
decline, as we
expect. The prospects for organic growth are strong as China's
penetration is currently low and we expect on-line advertising
to increase its
share compared with TV and print media.
We assess VIE structures on a case-by-case basis. For Baidu, we
from the fact that over 70% of revenues come from (and almost
all cash and
assets are held within) wholly owned subsidiaries rather than
controlled, consolidated entities. In addition, there is
between Baidu and Baidu Netcom (the VIE entity).
There remains a risk that Baidu's control over Baidu Netcom
could be lost due to
breach of contract by the equity owners of Baidu Netcom, or via
regulation/interference. However, we believe, first, that
(Robin Li) equity control over both Baidu, Inc. and Baidu Netcom
ownership risk. Second, Fitch believes the company's beneficial
with the Chinese government mitigates the regulatory risk.
Head of TMT Ratings, Asia Pacific
+61 2 8256 0307
Head of APAC Research,
Corporate Ratings Group
+61 2 8256 0366
Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234,
Additional information is available at www.fitchratings.com.
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