Bharti Airtel Debt Ratings Poised for Downgrade on Zain Acquisition

Bharti Airtel has been placed on Rating Watch Negative (RWN) by Fitch Ratings pending its potential acquisition of Zain's African assets for around US$10.7 billion. Fitch expects the ratings to be downgraded by one notch assuming that the deal is completed and substantially debt funded, as this would increase Bharti's funds from operations (FFO) adjusted net leverage ratio to a level inconsistent with the current rating.

Additionally, in the event of a downgrade the rating could remain under further downward pressure reflecting the potential costs associated with any bid for a 3G license and related capex. .

The RWN also takes into account the uncertainties surrounding the targeted turnaround of the loss-making operations of Zain's African assets, which reported a decline of 11% and 16% in revenues and EBITDA respectively in 9M 09 y-o-y, and, a net loss of US$37 million during the same period. Meanwhile, the assets included within the scope of the proposed acquisition generated revenue and EBITDA of US$2.7 billionn and US$871 million, respectively in 9M09. Fitch expects the combined entity to assume the net debt of US$1.7 billionn present at end-September 2009 on Zain's balance sheet at end-September 2009 relating to its African operations.

The RWN also considers the geographical diversification of Bharti's subscriber portfolio on completion of the deal and its expansion in Africa, where many markets are characterised by high subscriber growth, higher average revenue per users (ARPUs: average of US$8) and low telecom penetration rates (the average being 34%, excluding Ghana). However, Fitch also notes that the combined entity would be prone to geopolitical and currency uncertainties.

Fitch will seek to resolve the RWN once the funding mix for the acquisition is finalised, which according to the company's announcement, is expected at the end of March 2010. In resolving the RWN, Fitch will also seek clarification on the terms and conditions of the acquisition debt and also confirm whether all required regulatory approvals are likely to be obtained. Furthermore, the agency will take into consideration the financial profile of the combined entity and its future business plans when resolving the RWN.