Fitch Places Airtel On ‘Rating Watch Negative’ After Supreme Court’s AGR Verdict
Resolution of Airtel’s ‘Rating Watch Negative’ will depend on government rolling out a telecom bailout package, Fitch says.
Fitch Ratings Inc. has placed Bharti Airtel Ltd. on "rating watch negative" over unpaid regulatory dues arising from a recent Supreme Court ruling.
"The RWN (Rating Watch Negative) reflects uncertainty on the amount and timing of unpaid regulatory dues, after India's Supreme Court ruled on Oct. 24 in favour of the country's Department of Telecommunications’ definition of adjusted gross revenue,” the ratings agency said in a statement.
"This led to DoT's demand that Bharti Airtel pay unpaid dues on licence fees of $3 billion. There may be another potential demand of $2.9 billion in regard to unpaid dues on spectrum usage charges.”
The resolution of the Rating Watch Negative, 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’s ruling, it said.
Fitch Ratings estimated that Bharti Airtel's funds from operations adjusted net leverage could worsen to around 3.1-3.4 times for the financial year ending March 2020 (FY20, earlier estimate of 2.0-2.2 times)—excluding $6.3 billion in deferred spectrum costs—if the company had to pay entire estimated unpaid dues of $5.9 billion, funded out of debt.
"This leverage would be significantly higher than 2.5 times 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 $2.5-3.5 billion in the combined Bharti Infratel and Indus Tower entity, which is awaiting regulatory approval of the merger," it said.
However, deconsolidation of Infratel-Indus would lead to cash outflow for tower lease rentals, nullifying any significant leverage benefits. The company has approached the government to seek clarity on the exact amount and relief on the unpaid dues, out of which interest and penalties constitute about 75 percent.
The Supreme Court ruling is credit-negative for the industry, after DoT's demand of unpaid dues on licence fees and spectrum usage charges of at least $19 billion from telcos, it said. The court also ruled that telcos are liable to pay not just the principal but also the interest and penalty within three months of the order.
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The demand for unpaid dues pertains to a 14-year-old dispute regarding the definition of AGR, which DoT said should include all kinds of income generated by the telecom firms. Typically, telecom companies pay about 3-5 percent of AGR as spectrum usages charges and 8 percent as licence fees. Fitch said Bharti's leverage is unlikely to materially improve the case due to negative free cash flow.
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.Fitch’s Statement On Airtel
"Barring regulatory dues, we expect FY20 capex/revenue to remain high at 34-37 percent, with forecast capex of around $4 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 said.
The ratings 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.