The credit rating agency, Moody's Investors Services has affirmed Bharti Airtel Ltd.'s (Bharti) Baa3 issuer rating and senior unsecured debt ratings, as well as the 'Baa3' ratings on the senior unsecured notes issued by Bharti Airtel International (Netherlands) B.V., which are irrevocably and unconditionally guaranteed by Bharti.
The outlook on the ratings is negative.
"The affirmation of Bharti's Baa3 rating and negative outlook recognizes that the company's leverage metrics remain elevated as profitability continues to be under pressure," says Annalisa Di Chiara, a Moody's Vice President, and Senior Credit Officer.
Bharti reported year-over-year (YOY) contraction in EBITDA from its Indian mobile services at year-end March 2018, as its average revenue per user (ARPU) fell to Rs 116 for the quarter ended March 31, 2018 (Q4 2018) from Rs 189 during Q4 2017.
Although the EBITDA from its African operations increased by 37% over the same period, this was insufficient to mitigate the decline in the Indian mobile services segment. As a result, Bharti's consolidated EBITDA contracted 12% YOY and adjusted debt/EBITDA stood around 3.8x on March 31, 2018.
As we expect pricing pressures to persist over the next 12 months in the Indian mobile services segment, Bharti's ability to deliver to a level commensurate with its Baa3 rating requires more significant inorganic measures, including a further sell-down of its stake in Bharti Infratel Ltd (Bharti Infratel).
"To that end, we believe the recently announced merger of Bharti Infratel and Indus Towers provides a path for significant debt reduction with the possibility of an eventual sale of its stake in a larger business over the next 12-15 months," adds Di Chiara, also Moody's Lead Analyst for Bharti.
The combined entity Indus Towers will create a pan-Indian tower company with over 163,000 towers and operate across 22 telecom service areas. It will also establish the largest tower company in the world outside of China.
Following the merger, Bharti is expected to have a 33.8%-37.2% stake in Indus Towers.
Based on the company's announcement, the equity value of the combined entity is estimated at USD 14.6 billion, making Bharti's stake worth around USD 4.9-USD 5.4 billion, and thus providing significant potential for debt reduction within the next 12-15 months.
Furthermore, given the improving financial position of the African operations, it is Moody's expectation that Bharti will consider options to monetize a part of its stake in that operation as it focuses on measures to reduce consolidated leverage.
The negative outlook reflects the company's high leverage levels with adjusted debt/EBITDA of around 3.8x on a consolidated basis at year-end March 2018 and even higher when deconsolidating Bharti Infratel, which remains well above the downward trigger levels.
The ratings are likely to be downgraded within the next 6-12 months if heightened competition persists in its Indian wireless business, such that consolidated EBITDA or margins deteriorate further from current levels.
Upwards rating pressure is unlikely, given the negative outlook. However, the outlook could return to stable if Bharti's overall credit profile strengthens, such that adjusted debt/EBITDA is sustained at, or below, 3.0x, and the Indian mobile market shows signs of stabilization and/or improvement.
The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017.