Fitch Rates Bharti Airtel's Proposed USD Bonds At BBB

Fitch Ratings - Singapore/Hong Kong

Fitch Ratings has assigned India-based Bharti Airtel Limited's (Bharti, BBB-/Negative) proposed US dollar senior unsecured notes a 'BBB-' rating and Network i2i Limited's proposed subordinated perpetual notes a 'BB' rating. Network i2i is a wholly owned subsidiary of Bharti.

The proposed senior unsecured notes will be rated in line with Bharti's senior unsecured rating of 'BBB-', as they will rank at least equally with all its other present and future unsecured and unsubordinated obligations.

Network i2i's proposed subordinated perpetual notes will be rated two notches below Bharti's Long-Term Issuer Default Rating (IDR) - the same as the existing 5.65% subordinated perpetual bond rated at 'BB', to which they will rank pari passu. The issuance will be fully guaranteed by Bharti and will constitute a direct, unsecured and subordinated obligation of Bharti. The rating on the proposed notes will reflect the deeply subordinated nature, ranking junior to all existing and future debt obligations and senior only to Bharti's ordinary shares.

The proposed subordinated perpetual securities will qualify for 50% equity credit as they meet Fitch's criteria with regard to deep subordination, effective maturity in excess of five years, full discretion to indefinitely defer interest coupon payments, limited events of default and the absence of material covenants and look-back provisions. Equity credit is limited to 50% due to the cumulative interest coupon, a feature that we regard as more debt-like in nature. Fitch will treat the coupon payments as 100% interest in its financial analysis of Bharti, despite the 50% equity treatment of the principal amount. This approach is in accordance with Fitch's Corporate Hybrids Treatment and Notching Criteria.

We expect 50% equity credit for the securities until 2041, five years before the effective maturity date in 2046, which is when the replacement language expires. Equity credit drops to zero after 2041.

The proceeds of the proposed senior unsecured notes and subordinated perpetuals will be used to repay existing debt and for capex.

KEY RATING DRIVERS

Outlook Sovereign Driven: The Negative Outlook on Bharti's IDR reflects the Outlook on India's Long-Term Foreign- and Local-Currency IDRs (BBB-), which were revised to Negative from Stable on 18 June 2020. It does not reflect our view of Bharti's underlying credit profile - which has been improving on strong growth in the Indian and African wireless operations - but rather the heightened probability that India's Country Ceiling (BBB-) could be lowered to 'BB+'.

Robust Growth Defying Pandemic: We forecast Bharti's financial year ending March 2021 (FY21) funds from operations (FFO) net leverage to be 2.2x-2.4x, below the threshold of 2.5x above which we will take negative rating action. We expect Bharti's FY21 revenue and EBITDA to rise by around 18%-25%, on improvement in the Indian wireless market and continued strong growth in African markets, despite the pandemic-induced economic slowdown. Consolidated revenue and EBITDA in 9MFY21 rose by 21% and 34% yoy, respectively, defying the slowdown.

Improving Tariffs in Indian Market: We forecast Bharti's Indian wireless EBITDA to rise by around 40%-50% in FY21, led by 25 million subscriber additions and monthly average revenue per user (ARPU) improvement of 10%-12%. Indian mobile revenue increased by 26% yoy in 9MFY21 and EBITDA by 48% yoy, supported by a 23% rise in monthly ARPU to INR166 (USD2.2) and high monthly data usage of around 16.7 GB per user, one of the highest globally.

Regulatory Dues Factored: Bharti has so far paid about USD2.4 billion out of its previously unpaid total dues of USD6.4 billion owed to India's Department of Telecommunications (DOT) for a dispute over the amount of adjusted gross revenue (AGR) dues. We have factored in a balance of USD4 billion for AGR dues in our FY21 leverage, despite the Supreme Court allowing the balance to be paid over 10 years from March 2022.

The court's original ruling in October 2019 led the DOT to demand large unpaid dues on licence fees and spectrum-usage charges from incumbent Indian telcos. The DOT demand relates to a 14-year-old dispute on the definition of AGR, which the court ruled should include all income the telcos generate.

Positive FCF on Flat Capex: We expect Bharti to generate small positive free cash flow (FCF) in FY21 on flat core capex, lower interest costs and the government's two-year moratorium on the payment of existing spectrum dues, which will defer about USD840 million in each of FY21 and FY22. We expect FY22 absolute core capex will most likely be flat, ignoring one-time payments for spectrum assets.

Bharti will continue to invest in expansion of its 4G and fibre networks across Indian and African markets. We have assumed USD500 million in FY21 and USD1 billion in FY22 to fund the upfront spectrum investments. Bharti has completed the shutdown of its 3G network across India and has redirected its 900MHz and 2100MHz spectrum for 4G usage. Management has stated it will not participate in 5G spectrum auctions, at existing high prices.

Solid African Growth: We forecast African FY21 revenue and EBITDA to rise by 10%-15%, on growth in subscribers, mobile data and mobile-money services. African revenue and EBITDA in 9MFY21 rose by 13% and 16% yoy, respectively, on a reported currency basis. We expect mobile data and mobile money segments to expand by 10%-15%. Together they contribute around 40% of group revenue. We forecast FY21 EBITDA margin to remain at around 39% (post IFRS-16 of 44%-45%), as rising contributions from higher-margin 4G services and mobile money will offset foreign-exchange losses.

Indian Wireless Industry to Consolidate: We expect Bharti and Reliance Jio to increase their combined revenue market share to 80% (December 2020: around 75%) in the next 12-18 months, as the third-largest telco, Vodafone Idea, is rapidly losing market share given its weak balance sheet and limited financial flexibility. We believe that Vodafone Idea could lose 50 million-60 million subscribers in the next 12 months, after losing about 157 million subscribers in the past ten quarters.

DERIVATION SUMMARY

Bharti has a stronger business profile than Indonesian telcos PT Indosat Tbk (BBB/Stable; SCP: bb) and PT XL Axiata (BBB/Stable; SCP: bb+) because of its larger scale, better market position and integrated operations. Both Indosat and XL have a weaker market position, with revenue market shares below 20%, as they compete with a stronger market leader, PT Telekomunikasi Selular, which has a revenue market share of over 50%. Bharti has a lower forecast FY21 FFO net leverage compared with our forecast for Indosat of around 3.0x, but at a similar level with XL during 2021-2022.

Singapore Telecommunications Limited (Singtel, A/Stable; SCP: a-) has a stronger business risk profile than Bharti because of its solid market leadership position in Singapore, its ranking as the second-largest telco in Australia by sales through Singtel Optus Pty Limited (A-/Stable) and well-established platforms in fixed and mobile markets; and leading positions in Indonesia, India, Thailand and the Philippines through its associates. Singtel's ratings include a single-notch uplift from its SCP due to links with the sovereign (AAA/Stable). However, Singtel's FY21 FFO net leverage is broadly similar to Bharti's 2.3x-2.5x.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Revenue to increase by 18%-25% in FY21 and 10-15% in FY22;

- Indian mobile blended ARPU to increase by 10%-12% to around INR170 by end-March 2021 (9MFY21: INR166);

- Subscriber additions of 25 million in FY21 and 15 million in FY22;

- Operating EBITDA margin to remain at 36%-37% in FY21-FY22 (FY20: 36%) on monthly ARPU hikes. The EBITDA margin is based on pre-Indian AS 116 accounting adjustments;

- FY21 capex/revenue around 22%-25%. FY21 and FY22 capex includes spectrum payment of USD500 million and USD1 billion, respectively;

- African revenue to grow by a high single-digit percentage in FY21 on growth in subscribers and the mobile data and mobile money segments. Operating EBITDA margin to remain at 38%-40%;

- Effective interest rate of 5.5%-6.0%.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- A revision of the Outlook on the Indian sovereign to Stable would indicate that the Country Ceiling is likely to remain at 'BBB-' and therefore our Outlook on Bharti would be stabilised, provided that Bharti's FFO net leverage remains below 2.5x on a sustained basis.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- A downward revision of the Country Ceiling;

- Higher regulatory dues than Fitch expects, slower recovery in Indian operations or debt-funded M&A resulting in FFO net leverage remaining above 2.5x for a sustained period.

Rating Sensitivities for the Indian sovereign, from the rating action commentary dated 18 June 2020:

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- A structurally weaker real GDP growth outlook, for instance due to continued financial-sector weakness or reform implementation that is lacking.

- Failure to reduce the fiscal deficit after the pandemic recedes, and to put the general government debt/GDP ratio on a downward trajectory.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Implementation of a credible strategy to reduce general government debt after the pandemic that would put it on a path towards the 'BBB' peer median.

- Higher sustained investment and growth rates in the medium term without the creation of macroeconomic imbalances, such as from successful structural reform implementation and a healthier financial sector.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. 

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: Bharti's cash and equivalents of INR105 billion (USD1.3 billion) at end-December 2020 and undrawn committed facilities of INR61 billion, were sufficient to pay the short-term debt maturities. About 40% of short-term debt of INR241 billion (USD3.2 billion) includes revolving facilities which can be rolled over with the banks. The company has strong access to Indian and multinational banks and capital markets, as evident from its issuance of around USD7 billion of senior and perpetual bonds over the previous six years in US dollars, euros and Swiss francs.

SUMMARY OF FINANCIAL ADJUSTMENTS

We have excluded INR 433 billion of deferred spectrum costs from debt, as we treat such costs as capital commitments. We include annual spectrum payments in our capex forecast.

DATE OF RELEVANT COMMITTEE

27 November 2020

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

Should the Indian sovereign's IDRs be downgraded, the Country Ceiling may also be revised down in tandem, which would constrain Bharti's IDR and senior issue ratings to 'BB+'. If the Outlook on the sovereign's IDRs is stabilised, the Country Ceiling is likely to remain at 'BBB-' and therefore Outlook on Bharti's IDR would be stabilised.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means 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.