Mumbai: Bankers are planning to tread carefully before they lend money to telecom companies that have acquired spectrum to launch third-generation (3G) services, because of concerns about the ability of these firms to service debt, senior bankers told Mint.
With the cost of acquiring 3G licences almost double what the government initially expected and no single player getting a pan-India presence, banks are asking the firms to submit fresh business plans before they give loans to fund 3G businesses.
On 19 May, five weeks after it started the auction of radio spectrum for 3G telephony, the government managed to garner Rs67,719 crore from nine bidders for the 22 circle licences on offer.
Telecom firms are expected to raise at least Rs45,000-50,000 crore from banks to start with and their loan requirements could double when they actually start rolling out next-generation telecom services across the country.
Rating agency Crisil Ltd has reaffirmed its ratings of the bidders who took part in the 3G auction process, but bankers expect credit ratings to come under pressure once the companies leverage themselves by borrowing.
“We are counting on telecom companies’ ability to pull through the projects. A clear picture will emerge when they come with their revised business plan. The game starts now,” said the executive director of a large public sector bank that has substantial exposure to this segment.
Any loans to this sector will be rigorously monitored and evaluated, said several senior bankers.
Mint spoke to seven bankers of five large banks and none of them are comfortable giving fresh money to the telecom sector using the present loan appraisal processes. They did not want to be identified nor their banks named, considering the sensitivity of the issue.
So far, banks have been lending to the companies based on their creditworthiness, assets and future cash flow projections. But these are not enough as collateral, as telecom companies would need debt, which could be higher than their assets.
Among other conditions, banks may introduce some “negative covenants” that would allow telephone companies to sell their licences only after they repay their dues, to cap their debts and empower the lenders to sell off parts of their businesses.
“Till now, loan sanctions were based on the creditworthiness and past records of the companies. This will change. We will not disburse fresh loans until the companies give us their revised business plans,” said the chairman of a very large public sector bank.
Apart from paying licence fees, firms need money for the 3G roll-out. They cannot pledge their 3G licences to banks to raise loans, according to telecom ministry guidelines.
The debt of three large listed firms in this space—Bharti Airtel Ltd, Reliance Communications Ltd (RCom) and Idea Cellular Ltd—will go up substantially, according to calculations done by Mint’s Mark to Market column, based on company financials.
After the outgo of Rs12,296 crore, Bharti’s net debt-to- Ebitda—or earnings before interest, taxes, depreciation and amortization—ratio will rise to 0.7 times, based on its profit for the year ended March.
Taking into consideration the money required for the acquisition of the African assets of Kuwaiti telecom firm Zain, Bharti’s net debt-to-Ebitda ratio will be as high as 2.6 times.
Idea Cellular and RCom are much worse off. Their net debt-to-Ebitda ratio stood at 1.7 times and 2.5 times, respectively, before accounting for the 3G spectrum fee. After accounting for the fee, the ratio rises to 3.6 times for both companies.
According to an analyst with a foreign brokerage, a debt-to-Ebitda ratio of over 3.5 times is clearly stretched.
“Telecom is becoming a very, very risky sector,” said another executive director of a large public sector bank. “There is no lender comfort in this segment. In the whole process, the only intangible is the licence...banks will try to take a lien on all the tangible assets that come from now onwards.”
That would mean the banks will extend the loans on a project-to-project basis instead of lending directly to the telecom companies.
According to him, the sector could end up being a stressed one such as aviation and the government might have to intervene to save the telecom companies.
Telecom analysts, too, believe tough days are ahead.
Things are not going to be smooth for telecom companies as it will be tough to scale up the data business, said Kamlesh Bhatia, principal analyst at telecom and information technology consulting firm Gartner.
The companies need to look beyond one paisa per second billing model and have to segment their customer base to offer 3G as a premium service, he added.
“If companies commoditize data like voice, it will lead to bloodbath,” Bhatia said.
Samaresh Parida, director (strategy) at Vodafone Essar Ltd, agreed that it’s not going to be easy to predict the returns from 3G spectrum as the price of data will be commoditized, “but with Vodafone’s global experience, we will be able to exploit this opportunity by offering premium service to our customers”.
Vodafone has shelled out Rs11,617.88 crore to purchase licences in nine circles in metros and urban circles.
Telecom companies are raising short-term bridge loans to pay the licence fees and plan to borrow overseas to pay off the bank dues, but this will not be easy as cost of money is going up in the overseas market following the Greek debt crisis. The three-month London interbank offered rate, or Libor, a global benchmark for loan rates, is now 0.54%, its highest since July.
Telecom companies are, however, putting up a brave front. “The low Arpu (average revenue per user) in India’s mobile sector is a limitation, but with 600 million 2G subscribers, a diverse mix and even a limited migration will result in a significant 3G user base,” said a senior executive of a telecom company that operates both GSM (global system for mobile communications) and CDMA (code division multiple access) technologies.
The Indian market already has more than 149 million mobile data users and 50-60 million 3G handsets in use.