GIC picks up Singtel’s tab sinking S$1b into “junk-rated” Indian telecom company

Last Thu (7 Mar), Bloomberg published a news article revealing that Singapore’s GIC will be investing Rs5,000 crore (S$972 million) into the troubled India’s second largest telecom company, Bharti Airtel Ltd.

About a week ago, Bharti Airtel decided to announce plans to raise nearly Rs32,000 crore (S$6.2 billion) through a combination of rights issue and perpetual bonds. Bharti Airtel was planning to raise Rs25,000 crore (S$4.9 billion) through rights issue and the remaining via perpetual bonds.

The fundraising is to help reduce Bharti Airtel’s current massive net debt estimated to be Rs 1.06 lakh crore (S$21 billion) as at the end of last year. It’s current market capitalization is about Rs 1.3T (S$25 billion).

Currently, the single biggest shareholder of Bharti Airtel is Singtel, holding 39.5%. It has decided to renounce part of its rights to be picked up by GIC. As a result, Singtel’s stake in the Bharti Airtel will fall to 35.2% after the rights issue, while GIC will own about 4.4% for the first time. Previously, Singtel had been aggressively increasing its stake in Bharti Airtel from around 33% to 39.5% between August 2016 and February 2018. The reduced contribution from SingTel could be because it was wary of funding the infusion by adding debt to its books, analysts said.

Moody’s downgrades Bharti Airtel to “junk” status

Last month, Bharti Airtel’s credit rating was downgraded for the first time by Moody’s to below investment grade status as a bruising tariff war with India’s newest wireless operator Reliance Jio continues to hurt its revenue and profitability.

Mahesh Uppal, director at communications consulting firm ComFirst India, commented, “The incumbents are undoubtedly under great pressure and are struggling to compete. The large debt sitting on their books further impacts their ability to raise funds and invest in their networks.”

Moody’s downgraded Bharti Airtel’s rating by one notch from Baa3 to Ba1, a non-investment grade rating, while saying that the outlook remains negative. “The downgrade reflects uncertainty as to whether or not the company’s profitability, cash flow situation and debt levels can improve sustainably and materially, given the competitive dynamics in the Indian telecom market,” Moody’s said.

With the downgrade, analysts pointed out that the cost of borrowing would naturally increase, especially from overseas, by about 30-50 basis points.

Moody’s expects the profitability of Bharti Airtel’s mainstay, the Indian mobile market, to remain low over the next few quarters as there has been no change in its pricing. It noted that though the company’s debt levels may decline due to capital raising initiatives, weaker cash flow generation of the core mobile operations will likely keep leverage elevated.

The company’s cash generation has also been under pressure in the first nine months of the current fiscal. It’s been generating negative free cash flow for the last three quarters and this is for the first time in the last 15 years that the company has generated negative cash flows.

“A significant recovery in cash flow from the core Indian mobile segment is needed to strengthen the company’s credit quality and support greater financial flexibility,” Moody’s said.