Telcos’ Defaults Could Add to Problems at Banks With Weak Balance Sheets: Fitch

Indian banks’ exposure to troubled telecom companies is not large enough to pose a systemic threat, but defaults could add to problems at banks with weak balance sheets, Fitch Ratings said in a note on Tuesday.

The credit profiles of Indian telecom operators are under pressure from fierce competition stemming from the entry into the market of Reliance Jio last year and rising Capex required for the roll-out of 4G services.

“Some companies could find it difficult to service their debt, and we have the sector on a negative outlook,” Fitch said.

The ratings agency said that pressure is most severe at Reliance Communications (Rcom), which it downgraded last week to ‘CCC’ to reflect the real possibility of some kind of default. Rcom’s total debt is around $7 billion, a significant portion of which is owed to state-owned banks.

RCom’s EBITDA declined by 30% in the financial year to end-March 2017, and its earning are unlikely to be sufficient to cover interest costs and Capex over the coming year. Liquidity was also poor, with cash and equivalents of Rs 14 billion (USD220 million) well short of covering short-term debt of Rs 109 billion.

Fitch said that debt servicing could also become a problem at Aircel and Tata Telecom. Aircel is in the process of merging its wireless operation with Rcom, but the combined entity will still have limited pricing power and high leverage that will constrain its ability to strengthen its network position.

“We expect both companies to remain under pressure. Meanwhile, media reports suggest Videocon India’s lenders have already implemented a corrective action plan that could involve loan restructuring or forced asset sales,” Fitch said.

The banking sector is already struggling with significant asset quality issues and is likely to require hefty capital injections from the government over the next couple of years, it said.

Indian banks already have significant asset quality issues that could be made worse by stress in the telco sector. However, the total debt owed by telcos to banks is only Rs 913 billion ($14 billion), accounting for just 1.4% of all bank loans, according to the Reserve Bank of India.

Fitch said that exposure to other troubled sectors is much larger. Lending to iron and steel companies, for example, accounts for 4.7% of total lending. The power sector accounts for 8.7% and the road sector for 2.7%.

Fitch, however, said not all telcos face financial difficulties. The market leader, Bharti Airtel, is likely to meet repayments comfortably on the over $1 billion that it owes to banks. Vodafone and Idea Cellular are in the process of merging their operations, which will give the new entity a market-leading share.

The agency said that Idea’s balance sheet is stretched, but the combined company is unlikely to experience serious problems in servicing its debt. “Meanwhile, the risk of Tata Telecom missing payments is mitigated by the potential for its parent company, the Tata Group, to inject equity into its subsidiary. State-owned telcos, BSNL and MTNL, are likely to be in weaker positions, but almost all their debt is owed to the government,” the agency said.

Loans to telcos are also generally backed by spectrum assets, which should provide a better chance of recovery than, for example, a steel factory operating below capacity or a power plant that lacks a power purchase agreement. That said, the sale of spectrum assets might take longer than banks expect and not fetch full value, given that the top three telcos now have sufficient spectrum to run their operations for the medium term, Fitch added.

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