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Fitch Affirms Bharti Airtel at 'BBB-'; Outlook Stable
June 8, 2015 / 6:47 AM / in 2 years

Fitch Affirms Bharti Airtel at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/SYDNEY, June 08 (Fitch) Fitch Ratings has affirmed India-based Bharti Airtel Limited's (Bharti) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The agency has also affirmed the ratings on Bharti Airtel International (Netherlands) B.V's bonds. A full list of rating actions is at the end of this commentary. Also, Fitch has assigned Bharti's 4.375% USD1bn senior unsecured notes due 2025 a final rating of 'BBB-'. 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 3 June 2015. Bharti will use the proceeds of the notes for capex. However, we believe that its net debt for the financial year to 31 March 2016 (FY16) will reduce as we expect it to use its available cash and equivalents of USD2.2bn and expected proceeds of USD2bn from the sale of African tower assets to repay part of its existing debt. KEY RATING DRIVERS Improved Ratings Headroom: Bharti's funds flow from operations (FFO)-adjusted net leverage will improve to below 2.0x (excluding USD5.1bn deferred spectrum costs) for FY16 (FY15: 2.0x) due to mid-single digit percentage growth in FY16 EBITDA and the sale of 12,500 African towers for USD2bn. Increased Deferred Spectrum Liability: Bharti's deferred spectrum liability increased to USD5.1bn (FY15: USD2.3bn) as it committed USD4.7bn during the March 2015 auction - out of which USD775m was paid in FY15 and USD1.1bn to be paid in FY16. Fitch does not include the deferred spectrum liabilities as debt but treats the payments as capex as they fall due. The spectrum life is 20 years and Bharti will be able to fund the payments using cash generated from operations. Market-Leading Position: Bharti's ratings continue to be underpinned by its leading market position in India with a 30% revenue market share, diversified operations and its ownership of the most efficient spectrum assets in India. During the March 2015 auction, it retained its entire expiring spectrum and obtained additional spectrum in the 900MHz and 1800MHz bands. Bharti now has the largest share (40%) of the 900MHz spectrum among private telcos. Potential Profitability Pressures: Bharti's FY16 EBITDA margin could come under pressure (FY15: 34%) due to competition in the data segment, an increase in service tax to 14% (FY15:12%) and a likely reduction in Indian roaming revenue. However, the pace of voice tariff increases could offset these negative factors. Bharti's average Indian voice tariffs (USD2.4) will gradually rise as market share consolidates among the top-four operators, who will be able to use their increased market power to raise tariffs in response to high spectrum prices. Bharti's annual EBITDA would rise by USD550m-600m if average revenue per user increased by 10%. New Competitor: Bharti's FY16 blended tariff (FY15: USD3.1) could remain flat as data competition could dilute the benefits of improving voice tariff; Reliance Jio - part of Reliance Industries Limited (BBB-/Stable) - is entering the market with a data-focussed product. Slowing African Operations: We expect the African operations' EBITDA margin (FY15: 23%) to improve only gradually as usage grows modestly and the tariff differential between off-net and on-net calls narrows following a cut in mobile termination rates in some African markets. The operations continue to struggle to improve profitability as low usage, high costs and largely on-net voice traffic favour larger incumbent operators. During FY15, the African operations' EBITDA margin fell by about 300bp due to severe local currency depreciation and the slide in oil prices, one of the major income sources for most African markets. Larger Capex Requirements: We believe that Bharti's FY16 cash generation from operations will fall short of its capex of USD4bn, including planned capex of USD3bn and USD1.1bn spectrum payment for bandwidth won during the March 2015 auction. We believe that Bharti will need to invest at least 20% of its revenue on capex during FY16-17 to support fast-growing data services and to close the competitive gap with its African peers. Liquidity: We expect Bharti to refinance its entire USD3.4bn short-term debt through available cash and equivalents of USD2.2bn and expected proceeds of USD2bn from the sale of its African towers. Its access to capital is adequate as demonstrated during FY14-15 when it tapped capital markets multiple times and raised an aggregate of USD2.3bn. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to grow by mid-single-digit percentage in FY16, driven by fast-growing data services in Indian and African operations. - Operating EBITDA margin to decline by 50bp-100bp due to expected data competition in its Indian operations. (Please refer to "2015 Outlook: Indian Telecommunications Services", dated 10 November 2014 for details on Fitch's view on the industry.) - Bharti to report negative FCF in FY16 mainly due to additional USD1.1bn to be paid for spectrum won in the March 2015 auction. - Core capex/revenue of 20%. Spectrum capex of USD1.1bn in FY16. - Effective interest rate of about 5.5%-6%. RATING SENSITIVITIES 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. 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. Full List of Rating Actions: Bharti Airtel - Long-Term Foreign-Currency IDR affirmed at 'BBB-' - Senior unsecured rating affirmed at 'BBB-' - 4.375% USD1bn senior unsecured notes due 2025 assigned final rating of 'BBB-' Notes issued by Bharti Airtel International (Netherlands) B.V - 5.35% USD1bn guaranteed senior unsecured notes due 2024 affirmed at 'BBB-' - 5.125% USD1.5bn guaranteed senior unsecured notes due 2023 affirmed at 'BBB-' - 3.375% EUR750m guaranteed senior unsecured notes due 2021 affirmed at 'BBB-' - 3% CHF350m guaranteed senior unsecured notes due 2020 affirmed at 'BBB-' - 4% EUR1bn guaranteed senior unsecured notes due 2018 affirmed at 'BBB-' Contact: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Secondary Analyst Steve Durose Managing Director +61 2 8256 0307 Committee Chairperson Matt Jamieson Senior Director +61 2 8256 0366 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014) here Additional Disclosures Solicitation Status here <a href="https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context =2&detail=31">Endorsement Policy ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DIS

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