Billionaire Ambani Aircel Merger Math Fails to Woo Creditors

(Bloomberg) -- The bond market is showing nerves over Reliance Communications Ltd.’s plan to combine its wireless business with that of smaller rival Aircel Ltd.

The yield on the 2020 dollar bond of billionaire Anil Ambani’s company surged by a record 38 basis points last week when it announced plans to create the 50 percent-owned joint venture, data compiled by Bloomberg show. Moody’s Investors Service put the issuer on review for downgrade, concerned its remaining directly controlled businesses are smaller, even as it said it is positive on the combined wireless business.

While the joint venture would have subscribers of about 200 million, twice that of Reliance Communications, the creation of a separate entity would weaken bondholders’ claims on assets accounting for 61 percent of sales. In the event of failure, the merged entity would have to satisfy all its own debts first, Lucror Analytics Pte. said.

“The joint venture merger is most likely credit negative for debt holders of 2020 bonds,” said Trung Nguyen, Singapore-based senior credit analyst at Lucror, which slashed its recommendation to sell. “It will effectively subordinate bondholders claims on assets that bring in the largest chunk of the operating income.”

Claims on Reliance Communications’ dollar bonds maturing in 2020 will not be affected because the remaining business generates higher margins, a company official said, asking not to be identified citing rules.

Reliance Communications’ shares fell 45 percent this year, the worst performer on the S&P BSE 200 index, as the entry of Anil’s brother Mukesh Ambani into the market worsened price competition. Mukesh’s Reliance Jio Infocomm Ltd. is offering free calls. Yields on dollar bonds due 2025 sold by Bharti Airtel Ltd., the country’s no. 1 operator, rose 8 basis points last week.

Spun Off

Reliance Communications, the fourth-largest operator, announced on Sept. 14 that its wireless phone business will be spun off and merged in an equal joint venture with Aircel’s parent Maxis Communications Bhd. The entity will have the second-largest airwave holding and will benefit from longer license periods of spectrum allocation till 2035, Reliance said in a statement.

The two partners are already looking for global investors to infuse almost $1 billion of equity, Reliance Communications said in a Sept. 15 call. The deal will help reduce its debt by 200 billion rupees ($3 billion) in 2017, the company said, without elaborating. Aircel’s debt will decline by 40 billion rupees after the merger, according to the Sept. 14 statement.

Bank Debt

Reliance Communications will transfer about 140 billion rupees of bank debt and 60 billion rupees of deferred payment due to the government for airwaves to the venture, according to the official. Yield on company’s 2020 notes declined 3 basis points to 5.67 percent as of 4:25 p.m. in Mumbai.

Moody’s said in its Sept. 15 report that the issuer’s credit metrics are weakening with little progress on efforts to pare liabilities. It said the ratio of debt to earnings before interest, taxes, depreciation and amortization worsened further last quarter after reaching 6.5 times in March, “well above” the trigger for a possible rating cut. Leverage will remain “above our tolerance levels” for the current Ba3 rating even after the deal, the report said.

Uncertainty

The Moody’s report also highlighted uncertainty over non-core asset sales. Reliance Communications, which reported higher net income for the June quarter, said in December 2015 that it was in talks with private equity firms to sell its cellular towers across India. The tower deal is expected to close in October, the company said in the earnings call.

The chance of the company defaulting on its debt in the coming year has risen to 1.05 percent from as low as 0.93 percent on Aug. 31, according to Bloomberg’s default-risk model which considers factors such as indebtedness, profitability and stock volatility. That’s still down from as high as 1.74 percent a year ago.

“This merger is already attracting negative reactions,” said Raymond Chia, head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. in Singapore. “The covenants on Reliance Communications’ bonds such as those related to asset sales aren’t favorable for debt holders. Increased competition and high debt level also weigh on bonds.”

To contact the reporters on this story: Divya Patil in Mumbai at dpatil7@bloomberg.net, Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Arijit Ghosh at aghosh@bloomberg.net, Sandy Hendry