Bharti Ratings To Go Down On Zain Acquisition

Fitch Ratings has placed Indian telco Bharti Airtel on Rating Watch Negative (RWN) and expects that the ratings might go down by one mark if its deal with Zain  is completed and substantially debt funded. Bharti has been included in the list following its potential acquisition of Zain’s African assets for around US$10.7 billion.
The potential costs associated with any bid for a 3G license and related CAPEX can further downgrade the rating. The uncertainties surrounding the targeted turnaround of the loss-making operations of Zain’s African assets have been taken into account by RWN.

Fitch expects the combined entity to assume the net debt of US$1.7 billion present at end-September 2009 on Zain’s balance sheet at end-September 2009 relating to its African operations.

Warid Acquistion Won't Affect Bharti Ratings

­Fitch Ratings has commented that Bharti Airtel's acquisition of a 70% stake in Bangladesh's Warid Telecom will not have an impact on the former's ratings. Fitch has a Long-term Issuer Default Rating of 'BBB-' with a Stable Outlook on Bharti, and notes that the incremental capex and Warid's existing debt will not materially impact Bharti's credit profile. However, the agency is currently monitoring the negative impact on Bharti's revenues stemming from irrational pricing activity by the operators in India during October-December 2009, and the pending cost of 3G pan-India license fees and its impact on Bharti's credit profile; details of India's 3G auction is expected to be announced sometime in 4QFY10.

Under the agreement with Warid, the acquisition will be partly funded by the purchase of existing shares held in Warid by the Dhabi group for a nominal consideration and the balance by way of an issuance of fresh shares at par. The acquisition will give Bharti the management and board control of the company. Bharti will make a fresh investment of USD300m to expand the network coverage and capacity of Warid in Bangladesh. Although, Bharti has yet to confirm the period over which such capex would be made, Fitch expects the same to occur over a period of 2-3 years. Fitch does not expect the incremental capex to significantly change Bharti's capex plans. Further, Fitch notes that the maximum existing debt on Warid's balance sheet is USD300m, and accordingly the same is unlikely to materially impact Fitch's forecasted net leverage expectations for Bharti.

According to the Bangladesh Telecommunication Regulatory Commission (BRTC), Warid is the fourth-largest telecom operator in Bangladesh, with 2.92 million subscribers and a 5.8% subscriber market share at end-November 2009. It offers mobile services in all 64 districts of the country. At end-November 2009, the total subscriber base in Bangladesh was 50.55 million, with a penetration of 31.6%.

Bharti is one of India's leading private sector telecommunications providers, with integrated and diversified operations across mobile, fixed-line access, consumer broadband, direct-to-home television, long-distance and enterprise services. At end-November 2009, Bharti had a subscriber market share of 22.9% and a revenue market share of 33%. Bharti's FY09 reported revenues, EBITDAR and net income were INR373.5bn, INR170.6bn and INR78.6bn, respectively.

Emerging Markets Telecoms Adopt Cautious Approach In Capital Spending

­Debt ratings agency, Fitch Ratings said today that the challenging macro-economic outlook is driving emerging market telecoms to adopt a more cautious stance on capital spending for 2009. In a new report, Fitch compares technology development and investment trends across Emerging Asia, Latin America, Russia/CIS and Africa, and examines currency risks stemming from the recent devaluation of most emerging market currencies.

"With the exception of Africa and China where infrastructure investment is expected to increase by about 10% and 20% respectively, other regions are expected to report broadly stable-to-declining capex in 2009," noted Priya Gupta, Director in Fitch's Asia-Pacific Telecommunications, Media and Technology (TMT) team.

"Russia, in particular, is braced for sharp cuts, with many regional fixed-line incumbents expected to slash their capex by over 50% from the previous year, and mobile operators to reduce budgets by up to 25%," commented Nikolay Lukashevich, Senior Director and Fitch's Head of Russian/CIS Corporates.

Supported by capex rationing in 2009 as well as relatively resilient earnings in the recessionary environment, Fitch expects credit quality across the emerging markets to broadly register a stable-to-improving trend; although much will also depend on the competitive environment within individual markets, exposure to currency risk, event-risk related to M&A and/or capital management policies.

Fitch notes that growth in cellular (2G) services is slowing as penetration is now quite high in many emerging markets, while 3G services are yet to gain traction. Meanwhile, broadband is emerging as a key growth driver, although the agency expects medium-term growth to be constrained by low PC penetration in many emerging markets.

Fitch notes that the recent devaluation (in H208 through Q109) of most emerging market currencies against the US dollar is negative for telecom players, as it typically inflates capital spending and increases the cost of servicing dollar-denominated debt. Against this backdrop, the agency takes positive note of the fact that most rated Asian, African and Latin American emerging market operators (with the exception of the Argentinian telecoms) have limited exposure to foreign currency debt after hedging.

"After debt restructuring by Telefonica de Argentina and Telecom Argentina following the Argentine crisis of 2002, the two companies remain exposed to a currency mismatch between debt and cash flow generation," said Sergio Rodriguez, Director in Fitch's Latin American TMT team. "However, this is substantially mitigated by low leverage at less than 1.0x for both companies at end-2008," he added.

In Emerging Asia, Fitch notes that several companies have significant forex debt exposure, although in most cases this is substantially mitigated by low leverage as well as natural and purchased hedging measures. Within the portfolio, stand-outs include Indonesian operator PT Excelcomindo Pratama Tbk (XL, 'BB-' (BB minus)/Stable) and Sri Lanka's Dialog that have about a 50% share of foreign exchange debt and exhibit leveraged profiles; - however their currency risks are moderated by partial hedging (at XL) and significant forex earnings (at Dialog).

In Russia however, some telecoms operators are facing significant currency risks. For various reasons (including the scarcity of long-term, inexpensive Russian rouble financing), some telecom companies, particularly mobile operators, have preferred to predominantly raise foreign currency-denominated debt. Although this has allowed them to economise on interest payments in the good times, further significant rouble devaluation could significantly impair their financial flexibility.

A copy of the special report is available on the Fitch website (registration required).