Shares of Reliance Communications Ltd. have been spiralling lower. On Wednesday, the stock fell to below Rs 10 per share, hitting a lifetime low. Year to date, shares of the Anil Ambani led telecommunication firm have fallen 37 percent.
The most recent decline in the company’s share price followed a confirmation that it had defaulted on its dollar debt. This was not unexpected since the company has stated that as per a ‘standstill’ agreement with domestic lenders, it would not pay dues on any debt till December 2018. Though whether the standstill applies to the foreign bondholders is unclear.
But as the company’s share price continues to fall, that very standstill agreement may be at risk. Here’s why.
In June 2017, domestic lenders approved Strategic Debt Restructuring (SDR) in the case of RCom. As per details of the agreement released by the company, Rs 7,100 crore in debt was to be converted into 51 percent equity in the company. The company’s total debt stands at about Rs 45,000 crore.
While this plan was agreed upon in June, lenders decided to hold off on the actual conversion until December 2017. This is in accordance with Reserve Bank of India’s rules, which allow lenders 180 days to complete the actual conversion. In many other cases, the conversion has not actually happened even though it was approved for a variety of reasons. In the case of RCom, in June the hope among lenders was that deals that were in the works (such as a merger with Aircel Ltd. and a sale of the tower business to Brookfield Asset Management Ltd.) would fructify within the six month period. If they had, banks would have secured a relatively easy exit.
But that hasn’t happened.
The deals have failed to close and the stock has fallen. Notably, it has fallen well below the conversion price of Rs 24.71 per share, which the company arrived at using RBI’s formula and June 2 as the reference date. According to the RBI formula, conversion of debt to equity has to be at a price which is at least the average of the closing prices of the 10 trading days preceding the reference date.
Lenders, as many as 27 domestic banks, financial institutions and foreign banks, now face two options. Convert at Rs 24.71 per share and take a material mark-to-market loss immediately upon conversion. Or allow the SDR agreement to lapse, which, in all probability, will result in the account becoming a non performing asset.
Two lenders, who spoke to BloombergQuint on condition of anonymity, said that they are monitoring developments and will ‘co-ordinate’ their action against the company. On November 4, BloombergQuint reported that banks were not keen on approving the SDR in the current form as the conversion price is too high.
But the alternative is not an attractive one either.
If the SDR fails, lenders will have to provide against the Rs 45,000 crore in debt. This would impact bad loan ratios and profitability across most banks.
Either way, they will have to take a hit,
"If the debt is much higher than the underlying value of the company, the bankers will have to take a hit. That is always the case. Now whether you take it as a mark to market hit or a loan loss, that is something that the bankers involved need to decide on. Typically, delays lead to larger losses," said RK Bansal, former executive director at IDBI Bank. He was not commenting specifically on the RCom case since he is not involved in it.
Meanwhile, the company is battling its operational creditors as well.
On Wednesday, the National Company Law Appellate Tribunal issued a notice to RCom on an insolvency plea filed by Manipal Technologies Ltd.. Earlier, the National Company Law Tribunal had rejected the plea by Manipal Technologies, which claims that the company owes it Rs 2.7 crore. The matter will be heard on December 4.
A separate insolvency petition filed by Ericsson India, the telecom equipment vendor to RCom, is scheduled to be heard on November 23, according to the NCLT website. Ericsson claims the telco owes it Rs 1,156 crore.
If the insolvency petitions against the company are admitted, the implications for the SDR process are also unclear.