TEXT - S&P lowers rating on Bharti Airtel to BB+

A man talks on a mobile phone in front of a Bharti Airtel advertisement in Jammu April 26, 2010.

(The following was released by the rating agency)

Standard & Poor's Ratings Services today lowered its long-term corporate credit rating on India-based telecommunications service provider Bharti Airtel Ltd. (Bharti) to 'BB+' from 'BBB-'. The outlook is stable. The rating was removed from CreditWatch, where it was placed with negative implications on Feb. 19, 2010.

"We lowered Bharti's rating to reflect our expectation that the company's leverage and cash-flow protection measures will deteriorate significantly following its largely debt-funded acquisition of Zain Africa BV (Zain Africa), based on an enterprise value of US$10.7 billion, from Mobile Telecommunications Company K.S.C.," Standard & Poor's credit analyst Mehul Sukkawala said. "This, along with the higher-than-expected payment for a 3G license auction of about US$2.7 billion; the ongoing auction of the broadband wireless access spectrum; and the material increase in operating lease commitments will likely significantly increase Bharti's debt."

The Zain Africa acquisition also presents Bharti with the higher country, political, and transfer and convertibility risks, compared with India, which are associated with Zain Africa's operations in countries such as Nigeria (B+/Stable/B; T&C assessment: B+), Democratic Republic of Congo (not rated), and Zambia (not rated). But this is partly offset by the telecom industry's greater stability and resistance to economic cycles and macroeconomic pressures relative to other industries in Africa, as well as Bharti's geographic diversification across Africa.

"The acquisition provides Bharti with meaningful growth opportunities in Africa, which still has relatively low mobile phone penetration, and an opportunity to improve Zain Africa's relatively lower EBITDA margins," Mr. Sukkawala said. "The combined entity, in our opinion, would profit from economies of scale because Bharti's subscriber base would increase by more than 30% to over 170 million and its revenues would jump by nearly 50% to about US$12 billion. It would also have a leading position in India and many of the African markets"

The stable outlook on the rating is based on our expectation that the company will retain its leading market position, despite increasing competition for its India operations, and improve Zain Africa's operating performance.

The rating could be lowered if Bharti's business-risk profile deteriorates due to regulatory changes, competitive pressures, or an increase in country risk--especially in Africa--or if its financial profile weakens due to an aggressive growth strategy, resulting in debt to EBITDA consistently above 3x.

Conversely, the rating could be raised if the company significantly improves its operating performance--again, especially in Africa--or undertakes strategic measures such as raising equity, resulting in significant improvement in Bharti's financial metrics including expected debt to EBITDA of not more than 2x on a sustainable basis.

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