Reliance Communications’ debt downgraded amid default fears

Care and Moody’s cut ratings on concerns over Indian telco’s loans

Reliance Communications’ woes continued on Tuesday after the Indian telecoms group controlled by billionaire Anil Ambani had its credit ratings cut.

Care Ratings, India’s second-largest rating agency, downgraded all types of the company’s debt to “default”, the lowest rating. Moody’s followed suit, cutting RCom’s corporate family rating and senior secured bond rating to Caa1 indicating high credit risk.

The downgrades followed a turbulent two days in which bond and share prices in RCom slumped after media reports it had missed interest repayments to lenders.

The telecoms group has refused to confirm or deny reports of missed payments, causing alarm among investors already unsettled by its first annual loss, announced on Saturday. Its net loss of Rs12.9bn ($200m) for the year to March was in contrast to profits of Rs6.6bn the year before. It cited unprecedented competition — namely from upstart mobile network operator Reliance Jio, a company run by Anil’s brother Mukesh Ambani.

The yield on the company’s dollar bonds due in 2020 on Tuesday rose to 18 per cent, having risen 6 percentage points since Friday. By close of trading on Tuesday shares in the group had fallen 22 per cent to Rs19.90 since the start of the week — over the past year the shares are down roughly 60 per cent.

The crisis deepened on Tuesday after Gurdeep Singh, chief executive of RCom, sidestepped questions about the debt repayments during an analyst call on Monday.

Analysts’ questions centred on a report in India’s Economic Times, which alleged the group has failed to service loans from more than 10 banks.

Mr Singh did not confirm or deny that it has missed repayments, but said RCom wanted to refinance loans that fall due before September 30 with a new consortium of lenders.

He added that two pending transactions, one to merge the group’s wireless business with rival Aircel and another to sell its mobile phone towers to Canada-based Brookfield Asset Management, would boost sales and cash flow — and reduce debt by Rs250bn ($3.9bn).

RCom has net debt of Rs443bn ($6.9bn) that is 9.7 times its earnings before interest, tax, depreciation and amortisation — more than double the level analysts consider manageable.

“Reliance Communications has formally advised all its lenders that it will be making repayment of an aggregate amount of Rs250bn from the proceeds of these two transactions, on or before September 30 2017,” the company said on Tuesday before the downgrades.

It added that it was in discussions with lenders “to obtain their requisite consents for the two transactions and to refinance scheduled instalments falling due in the interim period”.

Care said it acted due to “significant stress on its cash flows and high levels of debt repayments”. Moody’s said that if RCom did not receive covenant waivers on loans there could be “significant implications” for bondholders.

RCom did not respond to requests for comment.

If lenders do not agree refinancing terms, or if the deals with Aircel and Brookfield fall through, RCom could be pushed into technical default.

“If they didn’t deny [the missed repayments] then the market will take them to be real,” said Trung Nguyên, an analyst at Lucror Analytics, the consultancy. “They are asking the banks if they can [avoid] paying anything until end September, that’s a terrible way to treat creditors.

“If one creditor accelerates the loans, the rest tend to follow also. The issuer can’t pay one creditor without all wanting payment.”Although market regulations do not require RCom or its creditors to disclose missed loan repayments, agreements with rating agencies do. But credit analysts say the group has refused to clarify whether it has made all its loan repayments on time.Pawan Matkari, analyst at Care Ratings, said on Tuesday: “We’ve been trying to reach the company and setting up the meetings and telephone conferences but we haven’t learnt anything yet. We would have to recognise missed payments as a default.”* This article has been amended since original publication to correct the spelling of Lucror Analytics

Financial Times

Reporting by Aliya Ram