Reliance Communications’ Debt Downgraded To Default By Care Ratings And ICRA
Anil Ambani, chairman of Reliance Communications Ltd., attends a signing ceremony (Photographer: Qilai Shen/Bloomberg)

Reliance Communications’ Debt Downgraded To Default By Care Ratings And ICRA

  • Stock down more than 4 percent in morning trade; lost over 40 percent in market value in two weeks
  • Care Ratings and ICRA have downgraded Reliance Communications’ debt to default
  • Moody’s Investors Services also downgraded the stock

Reliance Communications Ltd.’s short- and long-term debt was downgraded to default by rating agencies Care Ratings and ICRA Ltd. on Tuesday after the debt-laden telecom operator delayed repayments.

In its statement, Care Ratings said that Reliance Communications’ bank facilities worth Rs 17,356 crore and debt facilities worth Rs 3,630 crore were downgraded to Care ‘D’ or default, the lowest available rating for corporate debt.

The downgrade takes into account the delays by Reliance Communications (RCom) in servicing its debt obligations as a result of “significant stress on its cash flows and high level of debt”, it said in the statement.

Downgrade Delay?

Interestingly, in its statement, Care Ratings cited an over two-month-old default by RCom as the reason for downgrading its debt to default.

The revision in the ratings assigned to the bank facilities, NCD issue and short term debt issue of Reliance Communications Ltd. takes into account delays in the servicing of its debt obligations as a result of significant stress on its cash flows and high levels of debt repayments. The company has delayed the interest as well as principal repayments due on its non-convertible debentures. The NCD installment of Rs 375 crore due on February 7, 2017 was paid on April 10, 2017 by the company.
Care Ratings Statement (May 30, 2017)

"If the rating agency was aware of a delay in repayment of NCD dues, then they should have moved it to default rating at once. Subsequently, if the payment was made, the rating could be moved up again," said Amit Tandon of proxy advisory firm IiAS.

Tandon added that in some cases, the offering circular includes a provision for some delay in payments but this is not common in the case of NCDs.

This is the second downgrade by Care Ratings in the last eight days. On May 22, the rating agency had downgraded the company's long-term facilities to Care 'BB' from Care 'A-' and short-term debt to ‘A4’ from ‘A2+’.

ICRA And Moody’s Follow Suit

Within hours of the Care Ratings’ downgrade on Tuesday, another rating agency ICRA Ltd., an Indian subsidiary of Moody’s Investors Services, also downgraded RCom’s debt to default.

Long-term debt worth Rs 33,116 crore is now rated ‘ICRA D’ versus the earlier ‘ICRA BB’, said the rating agency in a statement. Short-term debt worth Rs 9,314 crore now stands at ‘ICRA D’ versus the earlier ‘ICRA A4’.

‘ICRA D’ indicates instruments in default or expected to be in default soon.

The revision in ratings takes into consideration the delays in debt servicing by the Group given its weak internal cash flow generation as against sizeable debt servicing obligations.  
ICRA Statement (May 30, 2017)

International rating agency Moody’s Investors Services downgraded Reliance Communications’ corporate family rating and senior secured bond rating to ‘Caa1’, that is speculative of poor standing or high credit risk, from ‘B2’.

“At the same time, the ratings are under review for further downgrade,” said a statement issued by Moody’s.

Reliance Communications’ liquidity position is fragile. RCom has around Rs 230 billion (Rs 23,000 crore) short-term debt and current long-term debt maturities through March 31, 2018. In addition, the company disclosed in its financial statements that it is still awaiting formal confirmation from lenders for waivers of certain loan covenants so the loan amount continues to be classified as a non-current liability. We believe failure to obtain could exacerbate near-term liquidity pressures.
Annalisa DiChiara, Vice President and Senior Credit Officer, Moody’s 

Moody's expects that the company's current cash position, coupled with its limited ability to generate free cash flow, will be insufficient to cover upcoming debt maturities unless its lenders waive off certain covenants while the company pursues the completion of its corporate restructuring.

“Given the weak operating outlook and high competitive intensity of the Indian mobile sector, there is no scope for RCom to delever, absent the successful execution of its corporate restructuring,” the statement added.

Reliance CommunicationsDebt Details

The telecom operator had a net debt of Rs 44,345 crore as of March. It reported a loss of Rs 966 crore in the quarter ended March, its largest since listing.

The company’s leverage, measured by total debt to equity, has risen to a record of 1.6 times, according its filings. Interest coverage ratio, which indicates the company's ability to service its loans, has also fallen to 1.1 times, the weakest since at least 2011.

Also Read: Reliance Communications Losses Widen On Disruptive Pricing, Intense Competition

In an investor call on Monday, Gurdeep Singh, chief executive officer of the wireless division of RCom said the company is in talks with lenders to refinance loans which are due up to September 30.

On Tuesday, in a statement to the stock exchanges, the company said it will repay Rs 25,000 crore of debt on or before September 30, 2017. But this is contingent on it receiving approvals for the three transactions currently underway, two of which will help reduce its debt burden, it said. .

  • To merge Sistema Shyam TeleServices Ltd.’s (SSTL) India wireless business with itself.
  • To merge its wireless operations with that of the Aircel Group.
  • To offload its tower business to Brookfield Infrastructure Group.

On completion of these transactions, the residual entity will be left with a lower quantum of debt, the statement said.

The Company states it has formally advised all its lenders that it will be making repayment of an aggregate amount of Rs 25,000 crore from the proceeds of these two transactions, on or before September 30, 2017. The said amount will cover not only all scheduled repayments, but also include substantial pre-payments to all lenders on a pro-rata basis.  
Reliance Communications Statement (May 30, 2017)

Reliance Communications’ Stock Down 40%

Reliance Communications’ Debt Downgraded To Default By Care Ratings And ICRA

RCom’s 6.5 percent bond which is due in 2020 fell 28.8 percent in the last one month. Its stock price on the National Stock Exchange has declined 40.5 percent in the same period.

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