The ratings of Asia-Pacific (APAC) telecommunications companies (telcos) in emerging markets can tolerate increased deferred spectrum liabilities at current levels if these essential costs are the main driver of high debt or weaker leverage, according to Moody’s Investors Service in a new report.
“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,” says Nidhi Dhruv, a Moody’s Vice President and Senior Analyst.
For emerging markets (China, India, Indonesia, Malaysia and 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. In particular, if Bharti Airtel Ltd. (Ba1 positive) spends up to INR370 billion ($5 billion) at 5G auctions, deferred spectrum and adjusted gross revenue liabilities could make up about 55% of its adjusted consolidated debt.
Among APAC’s developed markets, only Hong Kong SAR, China (Aa3 stable) has a spectrum payment mechanism with a deferred spectrum component, similar to many emerging market telcos. Hong Kong Telecommunications (HKT) Limited’s (Baa2 stable) leverage is higher partly as a result of this spectrum liability.
Despite an increase in debt, deferred spectrum payments have a limited immediate impact on operators’ liquidity and cash flow. Moreover, spectrum liabilities are long-dated and are not subject to refinancing risk. And these liabilities do not have maintenance or incurrence covenants, which support companies’ financial flexibility. In times of need, governments have provided an additional moratorium on telcos’ spectrum payments.
