Bharti Airtel International’s bond deal may be the answer to India’s troubled telecommunications industry.
The company is on the road this week to garner investor support for its first US dollar-denominated bond. If the deal is successful, the bond will not only provide relief for the company, but it could very well open doors for more funding opportunities within the cash-starved industry.
As investors grill Bharti executives and bankers about its credit fundamentals, foreign investors will be able to learn more about the telco industry, and bankers will have enough fodder to assure investors that the sector is on its way to recovery, with some potential companies that can also become interesting investments.
First off, Bharti is already starting with decent ammunition to get investors on their side. Granted, there are a few hotspots that need more scrutiny. The company is saddled with US$13.6 billion in debt due to acquisitions and US$2.6 billion of this is due in the next 12 months. Also, about 91% of total debt pays floating-rate interest, leaving the company exposed to interest rate increases. A 100bp increase in the interest rate on its US dollar borrowings will increase interest costs by about as much as US$90 million.
Even though the company is highly leveraged, there are a few reasons why Bharti’s bonds will be met with intense investor interest. The Asian bond markets are hungry for diversity after Chinese property deluged the market in January. And despite looming threats of a sovereign bond downgrade, Indian credit has tightened at least 15 basis points (bp) in the past week from real-money inflows.
Bharti also has a ‘BBB-‘ credit rating from Fitch, which is equal to that of the country’s ratings ceiling, and also has revenue coming from its African operations. Most importantly, parent company Bharti Airtel Limited will be providing an “unconditional and irrevocable” guarantee to India’s largest telecommunications operator.
For this reason, Bharti will be able to exercise strong negotiating power on pricing for its deal, which is expected to be as large as US$1 billion.
The success of this deal will be able to set a benchmark for other telecommunications companies to tap the market at a time when banks have essentially cut off funding to weaker players. And the chances of more telcos to come to the market has become even greater now that India’s regulatory environment is showing signs of sunnier days ahead as more clarification has been provided on licensing fees.
Telco operators will have to pay a one-time fee for excess spectrum over 6.2MHz, and Bharti’s bill will amount to INR52 billion. But now, the government has allowed telcos to pay the fee in phases over the life of the licenses, providing more flexibility for companies such as Bharti to meet payments.
Spectrum prices are also set to become more affordable after only 42% of the offered 2G spectrum was sold in a November auction for the 1800MHz auction. That resulted in a 30% cut in unsold spectrums mostly in Mumbai and New Delhi.
It is important for these improving industry circumstances to be communicated to foreign investors so that they can rest their concerns on issues that are becoming resolved, and keep an interest in this market for upcoming opportunities. Government efforts to ease the problem have been slow at best. Even though the Reserve Bank of India has eased restrictions on external commercial borrowings (ECB) for telco players to refinance loans needed to pay for the 2G spectrums, this advantage is really open to the largest companies.
For example, weaker companies like Reliance Communications has now reverted to borrowing from Chinese banks.
Increased exposure to this industry at a time when there is very little bond issuance from this sector will naturally persuade investors to also look for other potential companies that can come after Bharti.
The buildup of more issuance from the telco sector will also free up bank loans to this sector, which stands at INR930 billion (US$17.2 billion), or about 2% of India’s total bank lending. More liquidity for the sector will allow companies to spend more on capex and acquisitions that can boost market share and profitability, and a stronger telco company will in turn become more welcome for the banking industry for more loans.
It is fair to say that the telco industry is depending on Bharti to open the gates for possibly more funding. Judging by its credit fundamentals, it has a pretty good shot at it too.