Anil Ambani waiting at an Reliance Communications press conference. (Source: Bloomberg)

Bankruptcy Imperils RCom's $3.7 Billion Deal; Shares Plummet

(Bloomberg) -- Shares and bonds of Reliance Communications Ltd. tumbled after an Indian court ordered that the wireless carrier be placed in insolvency proceedings, jeopardizing its proposed $3.7 billion asset sale to Reliance Jio Infocomm Ltd.

Shares of RCom, as the company is known, plunged 15.3 percent to 10.5 rupees in Mumbai, while its 2020 dollar bonds plummeted by a record. The Mumbai bench of the National Company Law Tribunal on Tuesday accepted a petition from the Indian unit of network-equipment maker Ericsson AB, which is seeking to recover 11.6 billion rupees ($170 million) in unpaid dues from the telecommunications company controlled by billionaire Anil Ambani.

The court order sets back RCom’s planned sale of airwaves, towers and fiber assets to Reliance Jio, the phone company owned by Ambani’s older brother Mukesh, who is India’s richest man. The decision on RCom, which is seeking to reduce its $7 billion of debt load, comes after Aircel Ltd. filed for court protection from creditors in February as a bruising tariff war eroded earnings.

Bankruptcy Imperils RCom's $3.7 Billion Deal; Shares Plummet

RCom can appeal the verdict with a tribunal in New Delhi. The company and two of its subsidiaries will decide on the next course of action after studying the detailed order, RCom said in an exchange filing.

The company’s 2020 dollar bonds fell 11 cents on the dollar to 49.65 cents as of 7:27 p.m. Hong Kong, according to Bloomberg-compiled prices.

The decision means RCom will be placed under a court-appointed resolution professional who will have as long as 270 days to work out a debt repayment plan or liquidate the firm. The latter scenario would result in what could be one of India’s biggest bankruptcies and conclude the downfall of what was once the country’s second-largest phone operator.

A two-member panel headed by Justice B.S.V. Prakash Kumar said Tuesday that an insolvency-resolution professional will be decided on in a day or two.

If the company is sold under the insolvency process, Jio might have to clear a legal hurdle to bid for RCom. Recently implemented bankruptcy rules bar takeovers of stressed assets by entities related to the defaulting promoters. The rule is aimed at blocking back-door entry by delinquent owners.

Sharing Pacts

Jio has tower, fiber and airwaves sharing pacts with RCom and could suffer some loss of competitiveness if a rival were to secure the beleaguered operators’ assets.

The RCom assets “are of greater value to Jio and so it was not surprising that Jio won the initial bid,” Chris Lane, a Hong Kong-based analyst at Sanford C. Bernstein wrote in an email. “However, if you are arguing that Jio could be excluded from the process as a related party, then this changes things a bit.”

The bailout deal with Reliance Jio, announced in late December, had triggered a record rally in RCom shares. The stock plummeted this year amid a bevy of lawsuits, including one by a unit of HSBC Holdings Plc.

The company’s woes have been building for years as it delivered declining profits for six out of seven years, before posting its first annual loss in the year that ended March 2017. Earnings for the year to March 2018 will be announced on May 19.

Dozen Operators

Like other carriers, RCom struggled as India’s phone market became overcrowded -- there were a dozen operators in the country as of last year, versus three in China. Those pressures became particularly acute after Reliance Jio launched in September of 2016 with free services.

RCom is the second-largest listed company by assets in Anil Ambani’s business empire. Besides the phone carrier, Ambani controls Reliance Power Ltd., Reliance Capital Ltd., Reliance Naval & Engineering Ltd., Reliance Infrastructure Ltd., Reliance Home Finance Ltd. and Reliance Nippon Life Asset Management Ltd.

Though corporate failures have occurred in India before, the country never had formal bankruptcy rules until they were enacted into law in May of 2016. That empowered the central bank and local lenders to push companies into insolvency and accelerated their ability to recover bad loans. The law is now being tested through bitter court battles.

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