Fitch Ratings has placed Bharti Airtel Ltd on 'rating watch negative' over unpaid regulatory dues arising from a recent Supreme Court ruling.
Fitch placed Bhariti's 'BBB-' Long-Term Foreign-Currency Issuer Default Rating (IDR) on Rating Watch Negative (RWN) as well as its and Bharti Airtel International (Netherlands) BV's senior unsecured bonds and Network i2i's subordinated perpetual bonds on RWN.
"The RWN reflects uncertainty on the amount and timing of unpaid regulatory dues, after India's Supreme Court ruled on October 24 in favour of the country's Department of Telecommunication's (DoT) definition of adjusted gross revenue (AGR).
"This led to DOT's demand that Bharti pay unpaid dues on licence fees of USD 3 billion. There may be another potential demand of USD 2.9 billion in regard to unpaid dues on spectrum usage charges," Fitch said in a statement.
The resolution of the RWN, which may take more than six months, requires clarity on the exact amount and timing of the payment of unpaid dues and whether the government will provide any financial relief to the telecom sector affected by the court ruling, it said.
Fitch estimated that Bharti's funds from operations (FFO) adjusted net leverage could worsen to around 3.1x-3.4x for the financial year ending March 2020 (FY20, earlier estimate of 2.0x-2.2x) -- excluding USD 6.3 billion in deferred spectrum costs -- if the company had to pay entire estimated unpaid dues of USD 5.9 billion, funded out of debt.
"This leverage would be significantly higher than 2.5x threshold above which Fitch would consider negative rating action. However, Bharti may be able to partly fund the unpaid dues through a planned stake sale of USD2.5-3.5 billion in the combined Bharti Infratel (Infratel) and Indus Tower entity, which is awaiting regulatory approval of the merger," it said.
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However, deconsolidation of Infratel-Indus would lead to cash outflow for tower lease rentals, nullifying any significant leverage benefits.
The company has approached the government to seek clarity on the exact amount and relief on the unpaid dues, out of which interest and penalties constitute about 75 per cent.
The Supreme Court ruling is credit-negative for the industry, after DoT's demand of unpaid dues on licence fees and spectrum usage charges of at least USD 19 billion from telcos, it said.
The court also ruled that telcos are liable to pay not just the principal but also the interest and penalty within three months of the order.
The demand for unpaid dues pertains to a 14-year-old dispute regarding the definition of AGR, which DoT said should include all kinds of income generated by the telcos. Typically, telcos pay about 3-5 per cent of AGR as spectrum usages charges and 8 per cent as licence fees.
Fitch said Bharti's leverage is unlikely to materially improve the case due to negative free cash flow (FCF).
"We forecast negative FCF in FY20 (FY19: negative Rs 21,900 crore), as cash flow from operations of Rs 22,000-24,500 crore will be insufficient to fund large capex plans and moderate dividends of Rs 3,000-4,000 crore.
"Barring regulatory dues, we expect FY20 capex/revenue to remain high at 34%-37%, with forecast capex of around USD4 billion, as Bharti continues to strengthen its 4G network and fibre infrastructure. However, the company expects core capex, which excludes deferred spectrum payments, to have peaked and to decline significantly in FY20," it said.
The rating agency expected the government to hold 5G spectrum auction in the next 12-18 months but felt the incumbents may not participate if they have to pay unpaid regulatory dues in the short term.