India’s recently concluded spectrum auctions, which will cost operators a record-high INR1.1 trillion ($17.6 billion), is credit negative for the industry because it will increase operators’ debt and costs and reduce their ability to fund future expansion, Moody’s said.
The price operators will pay for the spectrum across four bands was 35 per cent higher than the government’s reserve price.
“These high prices will cause balance-sheet debt to rise significantly for most operators, including Bharti Airtel and Reliance Communications Limited (RCom), over the next 24 months and will limit their ability to make additional investments, possibly slowing the rollout of 3G/4G networks in India,” said Annalisa Di Chiara, a VP and senior analyst for the ratings agency.
The country’s operators are expected to raise tariffs in an effort to cover their higher costs, but Moody’s said any increases will be gradual, leaving the companies’ debt levels bloated for some time.
Airtel paid about INR291billion for 112MHz of spectrum, comprising 61MHz of 900MHz, 15MHz of 1.8GHz and 35MHz of 2.1GHz. It has retained its licences in the 900MHz band in all six regions up for renewal and added three additional “circles”, giving it close to a pan-India 3G footprint with 900MHz and 2.1GHz.
Its payment will raise the company’s pro forma reported debt levels by 27 per cent to around INR1 trillion ($16.1 billion), Moody’s said. Although in reality, the deferred payments for this new spectrum will come on the balance sheet in a staged process, it said. The operator will fund the upfront payment of around INR78 billion as well as future payments from cash and cash flow rather than additional debt.
RCom paid INR43 billion for 48MHz of spectrum to replace 48MHz of spectrum expiring this year. It was able to renew only 25 per cent of its expiring 900MHz spectrum but acquired additional spectrum in the 800MHz band. While it won just 10MHz of 900MHz airwaves, it has purchased 26.25MHz in the 800MHz band and 11.8MHz in the 1.8GHz band.
Moody’s expects RCom to also opt for a deferred payment schedule, which will limit its upfront cash outflow to around INR11 billion, but the deferred liability will raise its leverage and liquidity will remain strained.
Both Vodafone India and Idea are unrated by Moody’s.
Operators opting for deferred payments must make upfront payments of 25 per cent or 33 per cent, depending on the spectrum band, within 10 days of the auction’s close, with the balance payable in 10 annual instalments after a two-year moratorium.
Assuming the payments are differed, Moody’s said Airtel can maintain its financial profile and current issuer ratings or Baa3, while RCom can accommodate its Ba3 corporate family rating.
The ratings firm noted that in the longer term the spectrum is essential for enabling the operators to maintain their competitive positions, support their data growth and enhance cash flow generation.
But Tom Phillips, the GSMA’s chief regulatory officer, said the record prices are the result of pressure on operators to retain existing holdings to ensure service continuity for their customers
“Unfortunately these high prices will put increased financial pressure on operators and ultimately have a negative impact on consumers, reducing the value derived from the spectrum and hindering future economic growth and social gain in India,” he said.