Fitch Places Bharti Airtel On Rating Watch Negative On AGR Ruling

Fitch Ratings on Wednesday placed Sunil Mittal-led Bharti Airtel on ”rating watch negative” amid uncertainty over the amount and timing of unpaid regulatory dues arising from a recent Supreme Court ruling.

The global rating agency has placed Bharti Airtel’s BBB- Long-Term Foreign-Currency Issuer Default Rating (IDR) on Rating Watch Negative (RWN) and its and Bharti Airtel International (Netherlands) BV”s senior unsecured bonds and Network i2i”s subordinated perpetual bonds on RWN.

The RWN reflects uncertainty on the amount and timing of unpaid regulatory dues, after Supreme Court ruled in favour of the country’s Department of Telecommunication’s (DoT) definition of adjusted gross revenue (AGR), the agency said.

“This led to DoT’s demand that Bharti pay unpaid dues on licence fees of USD 3 billion. There may be another potential demand of USD 2.9 billion in regard to unpaid dues on spectrum usage charges,” Fitch said.

The rating action came in wake of recent Supreme Court verdict asking telcos including Bharti Airtel to pay up Rs 92,641 crore to the DoT over the AGR dispute. The Airtel alone has unpaid dues of Rs 41,507 crore, with nearly Rs 22,000 crore in license fees, penalty, and interest.

The resolution of the RWN, which may take more than six months, requires clarity on the exact amount and timing of the payment of unpaid dues and whether the government will provide any financial relief to the telecom sector affected by the court ruling, it said.

According to Fitch, Bharti Airtel’s funds from operations (FFO) adjusted net leverage could worsen to around 3.1x-3.4x for the financial year ending March 2020 (FY20, earlier estimate of 2.0x-2.2x) — excluding USD 6.3 billion in deferred spectrum costs — if the company had to pay entire estimated unpaid dues of USD 5.9 billion, funded out of debt.

On Tuesday, the company had deferred the release of its second quarter earnings report till November 14 as it sought clarity and “support” from the government on statutory dues after the Supreme Court verdict.

“This leverage would be significantly higher than 2.5x threshold above which Fitch would consider negative rating action.”

However, Bharti may be able to partly fund the unpaid dues through a planned stake sale of USD 2.5-3.5 billion in the combined Bharti Infratel (Infratel) and Indus Tower entity, which is awaiting regulatory approval of the merger, it said.

Fitch said Bharti’s leverage is unlikely to materially improve the case due to negative free cash flow (FCF).

“We forecast negative FCF in FY20 (FY19: negative Rs 21,900 crore), as cash flow from operations of Rs 22,000-24,500 crore will be insufficient to fund large CapEx plans and moderate dividends of Rs 3,000-4,000 crore,” it said.

“Barring regulatory dues, we expect FY20 CapEx/revenue to remain high at 34%-37%, with forecast CapEx of around USD4 billion, as Bharti continues to strengthen its 4G network and fibre infrastructure. However, the company expects core CapEx, which excludes deferred spectrum payments, to have peaked and to decline significantly in FY20,” it added.

The rating agency expected the government to hold 5G spectrum auction in the next 12-18 months but felt the incumbents may not participate if they have to pay unpaid regulatory dues in the short term.

Meanwhile, shares of Bharti Airtel closed trade at Rs 368.25 apiece, up 2.31 percent, on the Bombay Stock Exchange on Wednesday.―Business Today