TEXT - S&P affirms 'BBB-' Bharti Airtel rtg on MTN news

(The following statement was released by the ratings agency)

May 26

-- Bharti Airtel announces renewed efforts for a significant partnership with MTN Group, which could result in a potential transaction.

-- This could result in higher country risk and leverage but within our tolerance level. The combined entity would also become a leading emerging market telecom operator.

-- We have affirmed the ratings on Bharti Airtel.

Standard & Poor's Ratings Services said today that it has affirmed its 'BBB-' long-term corporate credit rating on India-based telecommunications service provider Bharti Airtel Ltd. The outlook remains stable.

"This rating affirmation follows Bharti's May 25, 2009 announcement of renewed efforts for a significant partnership with South Africa-based telecommunications group MTN Group Limited (not rated), which operates across various countries in Africa and the Middle East," said Standard & Poor's credit analyst Suzanne Smith.

The combined company is expected to benefit from economies of scale as it would become a leading emerging market telecom operator. Bharti would also benefit from MTN's operating experience in 3G and number portability, which is expected to be soon introduced in India. Similarly, MTN would benefit from Bharti's experience of growing market share and maintaining operating margins in a highly competitive environment. The transaction is expected to face limited integration risk as the two companies have almost no overlapping operations and would continue to operate under their respective managements.

Nevertheless, after the proposed partnership with MTN, Bharti would face higher country risk, as only about 25% of MTN's 2008 EBITDA came from South Africa (foreign currency: BBB+/Negative/A-2; local currency: A+/Negative/A-1). MTN's other operations include Nigeria (FC: BB-/Negative/B; LC: BB/Negative/B) accounting for more than 40% of MTN's 2008 EBITDA, Ghana (B+/Negative/B), Syria (not rated), and Iran (not rated). However, this is partly offset by the telecom industry's relatively higher stability and resistance to economic cycles and macroeconomic pressures.

"We expect the proposed transaction in its current form to result in an increase in debt for the combined entity compared with Bharti's current low leverage levels, but within our tolerance levels, with adjusted debt to EBITDA of about 2x in the near term," said Ms. Smith.

We note that the discussions are at an early stage and may or may not lead to any transaction or alteration.

The stable outlook on the rating is based on our expectation that the combined company will benefit from its leading market position across many emerging markets including India as well as maintain relatively strong cash flow protection measures including debt to EBITDA of less than 2x in the near to medium term. The rating or outlook could come under pressure if there is a change in the proposed structure of the transaction resulting in weaker pro forma financial metrics, including a ratio of debt to EBITDA of more than 2x on a sustainable basis. The following factors could also pressure Bharti's current rating: a deterioration in the business profile through weakening market position or operating margins; a significant increase in country risk especially for MTN; or significant negative free operating cash flows.

On the other hand, the rating could be raised or the outlook revised to positive if the company strengthens its leading market position while maintaining strong financial metrics, including a ratio of debt to EBITDA of less than 1.5x on a sustainable basis. In addition, Bharti needs to generate predictable and sustainable positive free operating cash flows, while maintaining adequate liquidity to fund its developments, as well as complete the MTN integration successfully.

RELATED RESEARCH

-- "Corporate Ratings Criteria 2008" published April 15, 2008, on RatingsDirect.