With loan default becoming a “real possibility” and rating agencies downgrading its books, lenders of Reliance Communications on Friday decided to invoke Strategic Debt Restructuring (SDR) and give a deadline till December 2017 for debt reduction to the Anil Ambani-controlled company. RCom chairman Ambani said the firm plans to complete deals to sell part of its wireless and tower business by September 2017, three months before the December deadline set by its lenders, and reduce the debt.
In a media briefing aimed at reassuring investors, Ambani said he was banking both on the Aircel merger and tower asset sale to Brookfield, which will reduce his company’s debt by 60 per cent, or Rs 25,000 crore. RCom which has close to Rs 45,000 crore worth of debt on its books as of March 2017, reportedly failed to service the debt of more than 10 banks.
Under the SDR scheme, banks will get an opportunity to convert the loan amount into 51 per cent equity which will be sold to the highest bidders, once the firm became viable. With banks invoking SDR, they will be able to hold the majority stake for up to 18 months. “Provisions are under SDR, which allows a standstill period of seven months and no conversion in that period will be done. At the end of the period, if we finish our programme, we exit that mechanism or then lenders move into action and look at the options,” Ambani said.
Banks constituted a Joint Lenders’ Forum (JLF) to consider and approved the company’s plans. “The lenders have taken note of the advanced stage of implementation of RCom’s strategic transformation programme involving inter alia the transactions for the wireless and towers business. The lenders have proposed to give time of 7 months till December 2017 to complete the above transactions, and reduce its debt by a substantial amount of Rs 25,000 crore,” RCom said. RCom will also present to the lenders its sustainable long term plans for servicing the remaining debt of Rs 20,000 crore, it said.
Moody’s Investors Services, ICRA, Fitch and CARE have downgraded the company’s debt rating amid heightened concern over the telecom operator’s loan repayment capability. “RCom’s rating downgrade reflects Fitch’s belief that some kind of default is a real possibility,” a Fitch statement said.
“We believe that weakening cash generation from its core wireless business may hamper the plan to demerge its wireless business into a 50:50 joint venture and sell 51 per cent of its tower business Reliance Infratel. Even if these transactions happen and debt is paid down, we believe the residual business is likely to be saddled with too much debt,” Fitch said on Thursday. The company reported a net loss of Rs 948 crore in Q4 of FY17.
The US-based agency has flagged poor liquidity, excessive refinancing risk, “compromised” business model and delays in deal execution as key reasons for the downgrade. “The rating action reflects Fitch’s assessment that short-term liquidity has deteriorated to a position where credit risk is very high,” Fitch said.
Fitch considers that Rcom’s business model is “compromised in the highly price-competitive market” due to the high level of debt and loss of market share to competitors with greater resources. “Its capital structure is unsustainable and it has excessive refinancing risk given that we expect cash generation may decline. During FY17, Rcom’s revenue and EBITDA (earning before interest, tax, depreciation and amortisation) declined by 10 per cent and 30 per cent respectively,” it said.