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Fitch puts Airtel's USD 1 billion FCCB bond on 'Negative Rating Watch'

New Delhi: US rating multinational Fitch on Friday assigned a rating of 'BBB-' to telecom major Bharti Airtel's proposed US dollar senior unsecured convertible notes.

The notes are rated at the same level as Bharti's foreign-currency senior unsecured rating of 'BBB-' and are also placed on Rating Watch Negative (RWN), Fitch said, adding Bharti's free cash flow (FCF) will remain negative during 2019-20 despite tariff hikes.

Airtel has announced plans to raise up to $1 billion through foreign currency convertible bonds (FCCB) or debentures, besides $2 billion through qualified institutional placement, public issue and preferential shares or private placement.

Fitch placed Bharti's ratings on RWN on October 30, 2019, following the Supreme Court verdict against the country's telcos on the definition of adjusted gross revenue (AGR) on which the operators, including Bharti, are now required to pay hefty dues to the government.

The rating agency said the resolution of the RWN, which may take more than six months, requires a Supreme Court ruling on the review petition subsequently filed by the companies.

The proposed interest-bearing issuance will be a senior, unsubordinated, unsecured and unconditional obligation and will rank pari passu to Bharti's existing and future senior unsecured indebtedness.

The terms and conditions on the proposed notes are similar to Bharti's existing senior unsecured notes except the presence of optional convertible features.

Bharti will use the proceeds of the notes to fund its capex or to refinance its debt, Fitch said.

Holders of the proposed notes can convert to equity at a conversion price premium from a predetermined stock price, during the life of the notes as per the terms and conditions.

Fitch estimates "Bharti's funds from operations (FFO) adjusted net leverage could be around 2.3x-2.6x for the financial year ending March 2020 (FY20) -- excluding $6.3 billion in deferred spectrum costs -- assuming the company pays estimated unpaid dues of $4.9 billion, raises equity of $2 billion and tariff hikes result in consolidated EBITDA growth of 20 per cent-25 per cent."

"We will stabilise the outlook only if Bharti maintain its leverage below 2.5x on a sustained basis -- the threshold above which we will take a negative rating action.

Bharti's management states that the company is committed to an investment-grade rating and raised about $5.6 billion in equity through a rights issue and the sale of equity in its African subsidiary, Airtel Africa Ltd, in 2019," a statement said.

"Management is confident of successfully completing the planned equity injection of USD 2 billion in January 2020," Fitch added.

Bharti may also raise $1.7 billion-$2.7 billion through a planned stake sale of the combined Bharti Infratel (Infratel) and Indus Tower entity, which is awaiting regulatory approval of the merger.

"However, deconsolidation of Infratel-Indus would lead to cash outflow for tower lease rentals, nullifying any significant leverage benefits," said the US agency.

It also said the Supreme Court's adverse ruling, leading to a DoT demand of $19 billion in unpaid dues on licence fees and spectrum usage charges from Indian telcos before January 24, 2020, is credit-negative for the industry. The court may rule on the review petition during January 2020.

"The simultaneous announcement by all telcos to hike tariffs by around 30 per cent-40 per cent across different prepaid tariff plans, effective from December 5, 2019, is credit-positive and is the first such increase in tariffs in a decade," the statement said.

Bharti announced in January 2020 that it will increase its minimum amount, that a customer needs to pay to keep a number active, to Rs 45 ($0.64) from Rs 35.

"Bharti's free cash flow (FCF) will remain negative during FY20 despite tariff hikes, as cash flow from operations will be insufficient to fund large capex and moderate dividends of Rs 30 billion-40 billion," Fitch said.

"Barring regulatory dues, we expect FY20 capex/revenue to remain high at 34 per cent-37 per cent, with forecast capex of around $4 billion, as Bharti continues to strengthen its 4G network and fibre infrastructure.

However, negative FCF will improve following the government's two-year moratorium on payment of existing spectrum dues, which will save about $840 million in FY21 and FY22," it added.