Fitch Ratings says Bharti Airtel Limited’s proposed tap issuance of its 5.65% subordinated perpetual notes issued in October 2019 via its wholly owned subsidiary, Network i2i Limited, will not affect the ‘BB’/RWN rating on the notes.

The proposed tap on the perpetual notes will share the same terms and conditions and constitute a single class of debt securities with the perpetual notes issued in October 2019 for all purposes under the trust deed. As such, the proposed tap on the perpetual notes will benefit from a subordinated guarantee from Bharti. In line with the original issue, the rating on the proposed tap on the perpetual notes is two notches below Bharti’s Long-Term Issuer Default Rating, reflecting the proposed securities’ deeply subordinated nature, ranking junior to all existing and future debt obligations and senior only to Bharti’s ordinary shares.

This approach is in accordance with Fitch’s Corporate Hybrids Treatment and Notching Criteria. The proposed tap on the perpetual securities will also qualify for 50% equity credit – the same as the original issue – under Fitch’s analysis. Fitch placed Bharti’s ratings on RWN on 30 October 2019, following the Indian Supreme Court’s verdict against the country’s telcos on the definition of adjusted gross revenue (AGR) on which the incumbent operators, including Bharti, need to pay hefty dues to the government.

The resolution of the RWN, which may take more than six months, requires a Supreme Court ruling on the modified plea subsequently filed by telcos and our assessment of the positive impact of EBITDA growth from announced tariff increases by all telcos in December 2019. Fitch estimates Bharti’s funds from operations (FFO) adjusted net leverage could be around 2.3x-2.6x for the financial year ending March 2020 (FY20) – excluding USD6.3 billion in deferred spectrum costs – assuming the company pays estimated unpaid dues of USD4.9 billion and tariff increases result in consolidated EBITDA growth of 20%-25%.

We will revise the Outlook to Stable only if Bharti maintains its leverage below 2.5x on a sustained basis – the threshold above which we may take negative rating action. Management states that the company is committed to an investment-grade rating and raised about USD7.6 billion in equity through a rights issue and the sale of equity in its African subsidiary, Airtel Africa Limited, in 2019 and another USD2 billion through an equity injection in January 2020.

The Supreme Court’s adverse ruling, leading to a Department of Telecommunications (DOT) demand of USD19 billion in unpaid dues on licence fees and spectrum-usage charges from Indian telcos is credit-negative for the industry. The DOT demand for unpaid dues pertains to a 14-year-old dispute regarding the definition of AGR, which the Supreme Court agreed should include all kinds of income generated by the telcos. Incumbent telcos filed a modified plea following the Supreme Court’s rejection of the review petition in January 2020, seeking relief on the unpaid dues, out of which interest and penalties constitute about 75%.

We expect Bharti’s Indian wireless FY20 EBITDA to rise by around 25%-35%, driven by a 30% increase in blended average revenue per user (ARPU) to around INR150-155 (USD2.1) by end-4QFY20 (3QFY20: INR135, 2QFY20: INR128). The simultaneous announcement by all telcos to raise tariffs, effective 5 December 2019, by around 30%-40% across different prepaid tariff plans, the first increase in a decade, is credit-positive. Bharti also announced in January 2020 that it will increase the minimum amount that a customer needs to pay to keep a number active to INR45 from INR35. We estimate consolidated revenue and EBITDA during 9MFY20 rose by 6% and 14% yoy, respectively, excluding the accounting adjustments due to the introduction of Indian accounting standard 116, which inflated reported EBITDA and finance leases, driven largely by the increase in ARPU by 30% to INR135. The Indian mobile segment’s profitability is improving, boosted by the 4G subscriber addition of about 47 million during 9MFY20 and cost savings from the planned closure of 3G networks by March 2020. We expect the full impact of tariff hikes to be realised starting 4QFY20. We estimate Bharti’s free cash flow (FCF) will be slightly negative in FY20 despite the tariff increases, as cash flow from operations will be insufficient to fund large capex even though core capex fell by 35% in 9MFY20 to INR161 billion (USD2.3 billion) and Bharti did not pay any dividends. We estimate FY20 capex/revenue to be around 28%-30%, barring regulatory dues, as Bharti continues to strengthen its 4G network and fibre infrastructure. However, its negative FCF will improve following the government’s two-year moratorium on payment of existing spectrum dues, which will save about USD840 million in FY21 and FY22. Management expects core capex, excluding deferred spectrum payments, to peak and decline significantly in FY20 and FY21. We forecast African FY20 revenue and EBITDA to increase by a high-single-digit percentage on a constant currency basis, driven by subscriber growth and mobile-money services. Bharti’s market position has improved to the largest or second-largest mobile operator in 11 of its 14 African markets. Revenue and EBITDA during 9MFY20 rose by 12% and 16% yoy, respectively, on a constant currency basis, driven by 9% growth in the subscriber base to 107 million and strong growth in mobile data and mobile money services and stable ARPU of USD2.8.