With interest rates at multi-year lows, Bharti Airtel has used money raised from the market to prepay liabilities associated with its spectrum purchases during the auction of 2014.
Under India’s spectrum auction rules, winners can opt to pay the majority of their obligations in the form of instalments over a period 10 years or more, and most companies opt to pay in instalments instead of at one go.
The scheme was introduced almost a decade ago, when the cost of money was also higher. As such, these loans from the government carry an annual interest rate of 10%.
However, over the last four years or so, interest rates in come down substantially thanks to the stimulus packages announced by various central banks.
Bank fixed deposits, which used to yield around 7.5% per year before COVID, now offer only 5.5%.
With interest rates likely to head back up from now, Bharti Airtel seems to have decided it is a good time to raise funds at prevailing rates and retire the costly debt to the government.
The company had originally purchased spectrum worth Rs 19,051 cr in the 2014 auction, and opted for the multi-year payment schedule.
Even after seven years, the company still owes Rs 15,519 cr (excluding interest) to the Department of Telecom for the 2014 spectrum. This amount was to be paid over the five years from FY27 to FY32, thanks to a four-year moratorium offered by the government recently.
Airtel said it has now paid the entire principal amount outstanding from 2014 auctions, thus saving around Rs 3,400 cr by way of lower interest costs.
“These liabilities were due in annual instalments from FY 2026-2027 to 2031-2032 and carried an interest rate of 10% (the highest rate amongst the deferred liabilities and borrowings) and an average residual life of 7+ years,” it said.
It also appreciated the government’s willingness to allow companies to prepay their liabilities and close out their liabilities.
“This allows the licensees to efficiently plan and use their cash flows,” it pointed out.
Bharti Airtel had acquired 128.4 MHz spectrum (including Telenor spectrum) for a consideration of INR 19,051 crores in the 2014 auction.
It remains to be seen if competitor Reliance Jio will also follow suit. The third player, Vodafone Idea, is unlikely to try this strategy, given that its cost of capital will be higher than the 10% that it pays as interest to the government of India.
Meanwhile, companies will have to stock up on cash ahead of the 5G auctions early next year. The auction is expected to take place in February 2022, unless disrupted by the upcoming third wave of Covid.