Airtel’s proposed rights issue credit positive: Moody’s

Telecom operator Bharti Airtel’s proposed rights issue is “credit positive” as it will enable the company to pare debt and improve liquidity, according to Moody’s. Airtel’s Board had last week approved fund-raising plans of up to Rs 32,000 crore through a combination of rights issue and bond — a move that will help the company take on market competition intensified by Reliance Jio, and cut debt.

“The proposed rights issue, if completed, is credit positive for Bharti because it will allow the company to reduce debt and improve its liquidity,” Moody’s Investors Service said in a statement.

Airtel’s fund-raising plans entail rights issuance of up to Rs 25,000 crore and Perpetual Bond with equity credit of up to Rs 7,000 crore.

Assuming the Rs 25,000 crore rights issue is concluded and all proceeds are used to pay down bank debt at the Indian operations immediately, the consolidated adjusted debt/EBITDA (Earnings before interest, tax, depreciation and amortization) would fall, Moody’s said.

“That said, we believe there are likely timing differences with respect to actual debt reduction particularly considering our expectations for capex and profitability of the Indian operations. As a result, we believe some of the debt reduction may only be temporary as bank debt may be re-borrowed to provide additional liquidity amid ongoing competition in the Indian mobile market,” it said.

The Moody’s statement said, still, it expects a significant portion of proceeds from the rights issue to be used to lower debt, strengthening Airtel’s balance sheet and providing the company with greater financial and operational flexibility for its Indian operations.

“But Bharti’s ratings are unlikely to change in the near-term as we expect leverage will remain elevated while profitability and cash flow of the company’s core Indian mobile segment remain under pressure,” it said.

On the company’s proposal for perpetual bond with conditions allowing for full accounting equity credit, it said that according to its methodology, any instrument issued by a speculative-grade company with a debt claim is treated as 100 per cent debt in calculating a company’s adjusted financial metrics.

“We will need to evaluate the amount and terms and conditions of the perpetual bond when disclosed,” it added.