Bank guarantee waiver to enhance Vodafone Idea's ability to secure debt funding: Analysts

If improved cash flows in the near term help Vi secure financing, then it will accelerate the telco's network expansion plan.

Analysts tracking the telecom sector are bullish on the prospects for cash-strapped Vodafone Idea to secure debt funding after the Union Cabinet approved waiving off bank guarantees service providers were required to furnish for spectrum purchased before 2022.

"It will primarily improve Vi's cash flows in the short term and boost its ability to repay its obligations. The calculus for banks and lenders to extend credit to Vi will also improve,” Shiv Putcha, founder and principal analyst at Mandala Insights, told Moneycontrol.

Vodafone Idea owes over Rs 24,700 crore in bank guarantees (BG). Airtel and Vodafone Idea together hold BG obligations in excess of Rs 30,000 crore. "The waiver of bank guarantees for mobile operators is a progressive move by the government and will go a long way towards stabilising the sector," Putcha said.

If improved cash flows in the near term help Vi secure financing, he said, it will accelerate the telco's network expansion plan.

Ashwinder Sethi, principal at consulting firm Analysys Mason, told Moneycontrol that debt funding was critical for Vi's network investment plans and, thus, its ability to turn around. "The bank guarantee waiver will positively impact Vi's ability to secure debt funding, as the potential lenders were also awaiting a decision."

Vodafone Idea raised Rs 24,000 crore through equity earlier this year and is now seeking an additional Rs 25,000 crore in loans and another Rs 10,000 crore in bank guarantees or letters of credit. This funding is essential for continuing its capital expenditure plans to compete with Airtel and Jio. The telco has outlined a capex plan of Rs 50,000 to Rs 55,000 crore over three years, executed through debt fundraising and equity raises.

Vi didn’t respond to Moneycontrol queries till the time of filing this story.

The telco, however, informed the stock exchanges on November 26 that it did not receive any communication from the telecom department (DoT) or the government on any decision taken.

A formal communication on the BG waiver will be made soon, confirmed government sources. Even as the Cabinet has agreed in principle to waive off bank guarantee requirements for deferred spectrum payments by telecom operators, it will be subject to stringent conditions, the sources said on Tuesday. The waiver will come with a rider that the telcos must club an additional three-month installment with their annual payments.

While Vodafone Idea has received a breather on the bank guarantee front, it continues to seek the government’s support and clarity on the AGR issue after a Supreme Court order refused to favour re-computing the AGR dues on the telcos. In September, the apex court had rejected 19 petitions filed by 19 telecom operators, including Bharti Airtel and Vodafone Idea, to recalculate their AGR dues. The ruling was a big blow for these companies, especially Vodafone Idea, which is in throes of funds crunch and owes the government thousands of crores in fees.

“As any interested party, the lenders are also looking at what is happening on the AGR matter. However, it was not a part of our business plan that we submitted to them for debt funding. So we are engaged with the banks… I, along with my promoters, are engaged with the bank and we should be able to close once some clarity emerges as to what is happening on the AGR front,” Vodafone Idea CEO Akshaya Moondra said on November 14 during an earnings call.

“Till this curative petition was dismissed, things were progressing as we had expected. I think it will probably take a while to get some clarity… I think they (banks) are also seeing that since the engagement is on what is happening in that direction.”

Vodafone Idea, however, mentioned that any reduction in the AGR liability was not a part of its business plan submitted to the lenders, based on which its techno-economic evaluation (TEV) was done by an external agency and submitted to the banks.

The COAI that represents three biggest private telecom service providers - Reliance Jio, Bharti Airtel and Vodafone Idea - separately said that the Cabinet’s decision to waive off the bank guarantee requirement will significantly alleviate the financial strain on the operators. “This landmark decision will greatly reduce the country's financial burden on telecom operators. While we are still reviewing the details, we are optimistic that this will enhance cash flow, free up capital, and support capital investments,” SP Kochhar, director-general of COAI, said in a statement.

The easing of financial burden is likely to help telcos make necessary investments in network and align with the next growth phase in the Indian telecoms sector, Prashant Singhal, EY India markets leader and telecom sector leader, said.