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-'. Also, Fitch has assigned Bharti Airtel International (Netherlands) B.V's 3% CHF350m senior unsecured guaranteed notes due 2020 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 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