5G: Spectrum liabilities for Reliance Jio, Bharti Airtel, Vodafone Idea to grow, says Moody’s

Spectrum liabilities of telecom carriers in the Asia Pacific (APAC) region will continue to grow over the next 1-2 years, due to the upcoming auctions and steep spectrum prices, particularly in India, Moody’s Investors Service said in a report on Monday.

“For emerging markets (China, India, Indonesia, Malaysia, and the Philippines), spectrum liabilities to gross debt will increase to more than 16.0% in 2021 and 2022, from 11.6% in 2020 and 9.3% in 2018, assuming India (Baa3 stable) completes its 5G spectrum auction in 2022,” the credit rating agency said.

India’s telecom minister Ashwini Vaishnaw has reportedly said the government is likely to conduct auctions for the 5G spectrum by “April-May next year”.

Currently, the sector regulator Telecom Regulatory Authority of India (TRAI) is undergoing consultations on the auctions and related modalities.

Moody’s added that in particular, assuming Bharti Airtel Ltd. (Ba1 positive) spends upto Rs 370 billion ($5 billion) at 5G auctions of which 40% is paid upfront, deferred spectrum and adjusted gross revenue (AGR) liabilities could make up about 55% of the telco’s adjusted consolidated debt.

The upcoming auctions and “steep spectrum prices” may also weaken leverage, if a company uses debt to fund capital spending as well as spectrum purchases.

“However, we can accept slightly higher leverage if deferred spectrum liabilities are the main driver of high debt or weaker leverage because spectrum is essential for telcos’ competitiveness,” the agency said.

Spectrum liabilities do not necessarily have a preferred rate of interest compared with other debt.

For example, “Bharti Airtel Limited’s (Ba1 positive) spectrum liabilities incur an interest rate of 7.3% to 10%, which is generally in line with its capital leases, but higher than its bond issuances, which generally have shorter tenors… India’s leading mobile operator, Reliance Jio, a subsidiary of Reliance Industries Limited (Baa2 stable), has recently used this option,” Moody’s said.

“Deferred spectrum liabilities are distinct from bank or capital market debt and are not subject to refinancing. Moreover, in exceptional circumstances, governments are likely to provide more payment buffers, which can alleviate cash flow pressure for some telcos,” said Nidhi Dhruv, a Moody’s Vice President, and Senior Analyst.

Historically, the leading telcos in India have paid the largest share of aggregate revenue for spectrum (7.6%), followed by Bangladesh (7.0%), the agency highlighted in its report.

However, India and Bangladesh tend to have operator-friendly spectrum payment terms. In previous auctions, Indian telcos paid 25%-50% of the total amount upfront, with the option to pay the rest over 10-15 years.

“Governments also typically allow a moratorium period before the annual spectrum payment installments kick in. For the upcoming 5G auction, we have assumed a two-year moratorium and a repayment term of 16 years thereafter for Bharti Airtel,” the New York-based agency said.

Most recently, in September 2021, the Indian government announced a telecom reform package, allowing a four-year moratorium on payments for past spectrum purchased and adjusted gross revenue statutory fees, to help with the sector’s recovery over the longer term.

“Bharti has accepted the four-year moratorium for payment of its statutory dues payable to the government, comprising around Rs 500 billion of spectrum liabilities and Rs 280 billion of AGR dues (both amounts as of 31 March 2021). We estimate that the deferment option saves the company around Rs 400 billion to Rs 450 billion of cash payments to the government over the same period,” Moody’s said.

Airtel’s adjusted debt/EBITDA will fall to around 2.7x at March 2023 from 3.8x at March 2021, as the profitability expands and it uses free cash flow to pay down a significant portion of debt (which includes deferred liabilities) by fiscal March 2023, it added.