No rating upgrade for Bharti Airtel anytime soon: Moody's

India's biggest telecom spectrum auction concluded on March 25 and raised USD 17.7 billion. Bharti Airtel, Vodafone and Idea Cellular committed for USD 4.7 billion, USD 4.2 billion and USD 4.9 billion worth of bids in the auction, respectively.

Below is the transcript of Laura Acres's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.

Ekta: Overall can you tell us what your analysis is with regards to the spectrum auction payout that the likes of Bharti as well as Reliance Communication, Idea have and what impact does it have in terms of the credit rating for the sector as well as maybe individual companies?

A: Before I get into the midst of your question, what I would like to do is actually just take a step back and let us just think about the broader implications of the auctions. Obviously we had 19 days of bidding, we had 115 rounds, we ended up with record pricing. So, in total, we saw some USD 17.5 billion raised. This compares to the reserve price of USD 12.9 billion, so some 35 percent premium there. And that obviously is going to have implications right across the sector. And if I were to rule this down and think about individual companies that we rate, Bharti Airtel, they had some USD 4.5 billion in total fee in total spectrum fees.

They have an upfront payment of approximately USD 1.2 billion which will go out over the next 10-12 days. And if we think about that company from a cash flow perspective the up front payment can be paid out of existing cash in cash flow and even because of the deferred payment mechanism, we would certainly expect the ultimate payments to come out to be in line with the company’s cash flow generation. So, ultimately, there should not be any increase in debt. There should be no incremental increase in debt simply as a result of the auction. Having said that though, the debt payment or the liability is actually going to be recognised as debt and as a result that leverage will increase for each of the telecommunication companies (telcos) that we rate. But again, in the Bharti context, we expect that this to be manageable in the context of their rating.

Anuj: So, in that case, going forward, what are the chances of a bit of rating upgrade for both Bharti and any other company that you track?

A: We are a little bit away from a ratings upgrade from Bharti. At the moment we have got an approximate three times debt earnings before interest, taxes, depreciation, and amortization (EBITDA) and that is on pro forma basis. Within that we have already recognised the proceeds from the tower sales which have not yet been paid in totality. We have also had Bharati sell down a further stake in Infratel and those proceeds will be used towards debt reduction. But even at three times debt EBITDA, it is at the upper end of our tolerances for its BAA3 rating. Having said that, this is a company that on a fundamental basis continues to deliver. If you actually look at the bank and bond debt outstanding for Bharati, it has been coming down considerably for the past couple of years and that is a trend that we very much expect to continue. But still we are probably a little bit away from a ratings upgrade.

Ekta: Can you for the benefit of our viewers explain to us when you talk about the Bharti likely opting for a deferred payment model? What would that mean and what sort of impact could we see on Bharti’s financials if in case it does undertake that?

A: Sure, it is our expectation that actually most operators will take advantage of the deferred payment mechanism. In summary, what we have is depending on the spectrum that an operator has bid for, they will have to make an up front payment of between 25 and 33 percent for that particular spectrum and those upfront payments should be due within the next couple of weeks. The residual amount can actually be paid over a 12 year period, so that is a 2 year moratorium and then plus 10 years of annual payments. And, again, it is our expectation that most operators will take advantage of that. One point to note though, is that deferred payment mechanism, it will have to be recognised as debt because it clearly is a liability on each operators balance sheet.

Ekta: What is the risk to the ratings of say a Bharti and maybe a Reliance Communication, the other one that you look at?

A: With respect to Bharti, certainly we think the rating currently holds while I mentioned before, leverage continues to remain a little bit high. When we look at the overall grand plan, we certainly see the rating staying where it is. I am not expecting any immediate pressure on the rating as a result of the auction for Bharti. For Reliance Communication (RComm) their total payment on the bid was about USD 700 million of which some USD 200 million will be paid up front. But RComm is certainly a company that is highly levered. Certainly its spectrum payment was at the high end of our expectation and it is a company that is also continuing to face liquidity pressures as well. If you were to look at Reliance Communication over the next 12-18 months, with a combination of capital expenditure (capex) payments, with a combination of debts that needs re-financing and also now spectrum payments as well. Under our estimates this is a company that will probably need to raise USD 800 billion over the next 12-18 months. Having said that this is a company that retains excellent access to the local bank and bond markets and therefore we are not envisaging any issue with its re-financing strategy.