Rising global interest rate environment – the increase in global interest rates was having a disproportionate impact on emerging and frontier market capital flows, USD interest rates, currency volatility and sovereign fiscal situation in most of the frontier markets where Airtel Africa operates.
Macroeconomic volatility – there was limited fiscal space for sovereigns to manoeuvre given higher than average debt/GDP ratios and related capital flow uncertainties. There was foreign currency (FCY) scarcity and global inflationary pressures.
Funding sources – as a telecom player with large infrastructure investment needs in countries with shallow financing markets and flight of capital given global risk-off environment.
FX convertibility issues and trapped cash – Airtel is the number one and/or number two telecoms provider in 13 of its 14 jurisdictions so were generating meaningful surpluses in local currencies, many exotics, but had most of its capital expenditure in US dollars leaving it exposed to FX volatility.
Airtel Africa had a treasury vision to identify innovative long-term financing preferably in fixed interest rates and local currency (LCY). It wanted to reduce holding company (Holdco) debt in FCY and replace FCY debt with LCY debt in operating countries thereby mitigating FX risk. It also wanted to safeguard and mitigate trapped cash situations.
“As treasury we see ourselves as a thought leader to the business to help navigate the unprecedented environment, through innovative solutions and partner business, in delivering our vision for growth of digitisation and financial inclusion in our operating jurisdictions in Africa,” explains Sidhanth Hota, Assistant Treasurer.
Africa Airtel targeted financing solutions with Development Finance Institution such as International Finance Corporation (member of World Bank Group). It introduced local currency facilities to mitigate FX risk. The company established eight-year long-term liquidity in shallow banking markets lacking long-term financing/underdeveloped debt capital markets. It also introduced fixed rate debt in a rapidly rising interest rate environment to mitigate interest rate risk.
Treasury and finance collaborated with supply chains in order to rework leases to reduce components linked to the FCY rate. In markets with severe paucity of FCY, it worked to move vendor contracts into LCY contracts. An import substitution strategy was implemented wherever possible.
Airtel focussed on de-risking its balance sheet by continuing to localise its debt, substituting FCY debt especially at Holdco level with debt at operating country level and where possible, in LCY. This reduced Holdco debt by US$1.8bn in the last 24 months thus mitigating FX risk.
There was a steadfast focus on only LCY financing and in the last 12 months, approximately 95% of incremental debt was taken in LCY by increasing engagement with regional and local banks. Thus, improving the currency mix of debt FCY external debt (including Holdco) as of March 2021 was 84% of total debt whereas now it is below 50%. Only about a third of the external debt is in foreign currency.
Another significant area of focus was to mitigate the risk of having trapped cash in operating entities facing currency devaluation risk. Despite operating in challenging macroeconomic environments treasury managed to achieve the highest level of cash upstream from the Opcos, an increase in up-streams over the last 24 months at CAGR of 90% per annum, with an estimated pro-forma FX cost save/risk mitigation from risk mitigation measures of US$40-50m in the last 12 months.
As an emerging market telecoms player, ESG is a core part of its business and a part of the treasury strategy. Airtel Africa’s operations have a strong linkage to social development since they directly lead to digital and financial inclusion in low-income countries.
Best practice and innovation
“If we had to grow and grow fast, we had to invest,” says Hota. Treasury had to ensure it astutely managed interest rate risk in a high interest rate, high inflation environment, find diversified sources of capital, manage currency scarcity and all other manifestations of a volatile global environment.
This required treasury to work across three verticals of debt, risk and liquidity management to provide sustainable, future-proof innovative solutions to the business.
“Without treasury projects to find sustainable long-term local currency financing to fund infrastructure investments, mitigating FX risks as we expand networks and the ability to hedge or mitigate any risks to the surpluses we generate, it would be difficult to spur investments,” concludes Hota.
“If we had to grow and grow fast, we had to invest.”
Sidhanth Hota, Assistant Treasurer