The final rating on the notes follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 13 March 2014. Bharti will use all the proceeds from the notes issue to refinance its existing debt. The agency has also affirmed the ratings on Bharti Airtel International (Netherlands) B.V's following instruments:
- 5.125% USD1.5bn guaranteed senior unsecured notes due 2023 at 'BBB-'
- 4% EUR1bn guaranteed senior unsecured notes due 2018 at 'BBB-'
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 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 be 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 could only offset the increased debt on consolidation of Qualcomm's subsidiaries holding 2300MHz spectrum in four Indian zones and be used for two acquisitions in Africa. 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. Liquidity could also benefit from Bharti's plan to monetise its stake in its Indian tower arm, Bharti Infratel and in its African tower portfolio. 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.