Domino Effect Pulls Down Key Reliance Group Companies Into ‘Default’ Grade

The Anil Ambani-led Reliance Group has seen most of its key operating companies downgraded to ‘D’ or default grade, as debt pressures spill over across the group.

The latest to have been downgraded is the group’s once flagship financial services holding firm⁠—Reliance Capital Ltd.

On Friday, Care Ratings Ltd. downgraded various debt facilities of Reliance Capital to D, following a delay in repayments to debenture holders. The company blamed a technical glitch in bank servers for the delay, which was eventually corrected and the debenture holders were paid in full. The ratings agency, however, also cited a fast deteriorating liquidity situation at Reliance Capital as one of the rationales behind the eight-notch downgrade.

Reliance Capital’s downgrade followed a week after subsidiary Reliance Home Finance Ltd.’s rating was also pegged down to default grade by Care Ratings.

Reliance Commercial Finance Ltd., another subsidiary of Reliance Capital, is also now rated default grade by Care Ratings.

The build-up of pressure across the financial services businesses is the last domino to fall within the Anil Ambani group.

The group’s non financial businesses⁠—ranging from Reliance Communications Ltd. to Reliance Infrastructure Ltd. and Reliance Power Ltd.⁠—are all either rated at ‘D’ or just above it.

According to Credit Suisse’ Corporate Health Tracker dated Aug. 22, 100 percent of debt of the Anil Ambani group’s non-financial businesses now has an interest coverage ratio of less than 1. The interest coverage ratio represents a company’s ability to repay debt from its earning.

Together, these Reliance Group companies have gross debt of Rs 1.1 lakh crore, shows data from the Credit Suisse report. The Anil Ambani group was one among the ‘House of Debt’ groups first identified by the brokerage house in 2012.

Weakness Spreads To Financial Services

While the weakness across Reliance Group’s non-financial businesses has persisted for some time now, its financial services units have also succumbed to liquidity pressures in recent months.

The collapse of Infrastructure Leasing & Financial Services in September 2018 led to a number of non-bank lenders being virtually shut out of the capital markets. Reliance Capital and its subsidiaries were among them. According to the Credit Suisse report quoted above, which included data till the end of the June quarter, the group’s NBFCs have not been able to raise funds from the debt market since January.

As a result, liquidity pressures have risen.

According to Care Ratings’ analysis published on Sept. 20, Reliance Capital only had Rs 19 crore in cash as on July 31 as compared with Rs 2,941 crore as on March 31, 2018. The company has to make Rs 1,642 crore worth of repayments by December, the rating agency said.

To be sure, on Sept. 13, Reliance Capital received Rs 2,480 crore from the sale of its stake in its mutual fund arm to Nippon Life Insurance. The total consideration for this deal is set at Rs 6,000 crore, which will help the financial services firm bring down its debt.

An email sent to Reliance Capital on Monday seeking further clarity on the company’s liquidity profile was not answered.

The weak liquidity profile at Reliance Capital has, in turn, raised doubts about its ability to fund its subsidiaries—Reliance Home Finance and Reliance Commercial Finance. Both have seen downgrades to default grade this month.

“Care had earlier factored in linkages between Reliance Home Finance and its parent Reliance Capital. Moderation in Reliance Capital’s profile has led to weakening of these linkages as the parent may not be in a position to extend adequate support to its subsidiaries,” the ratings agency said, citing its rationale for downgrading the mortgage firm on Sept. 12, 2019.

Group Inter-Linkages Complicate Resolution

Bankers, who are involved in the process of resolving stress across the group’s firms, are also having to deal with complex inter-group linkages.

Pathak HD & Associates, auditors to Reliance Capital, pointed out during the March quarter results that the financial services company has inter-corporate deposits to two Reliance Group entities aggregating to Rs 2,812 crore in Q4 FY19, which declined to Rs 2,235 crore in the April-June period.

To be sure, Reliance Capital has been classified by the Reserve Bank of India as a core investment company. The core business of a CIC is to invest in the securities of group companies.

Reliance Home Finance, also has considerable linkages to group firms. According to the auditor note in Reliance Home Finance’s financial statement for the first quarter, the housing finance company has an exposure of Rs 8,078 crore to group companies and other corporate entities. The overdue amount on these loans stood at Rs 1,553 crore as on June 30, statutory auditors to the company said in their assessment.

As such, resolution of stress in any one of these companies is dependent on other group firms.

For instance, in the case of Reliance Home Finance, the mortgage firm has asked that repayments to lenders be linked to the dues that Reliance Home Finance can recover from loans to group companies, including Reliance Infrastructure and Reliance Power, three people in the know told BloombergQuint on the condition of anonymity.

Since there is a considerable overlap in the lenders to Reliance Home Finance, Reliance Infrastructure and Reliance Power, the housing finance company has proposed that it will repay its lenders when it has received repayments from these group companies, one of the bankers quoted above said.

The bankers involved in the resolution process, though, are of the view that any resolution plan being proposed will have to go through an independent assessment of the company and its financial position. They are not in favour of linking various resolution plans, another of the bankers quoted above said.

Linking the resolution plans of the group’s financial services businesses to the non-financial units could only delay matters, as some of these firms are undergoing insolvency proceedings while others have no clear resolution plan approved.

A resolution plan approved by Reliance Naval and Engineering has been rejected by lenders. Lenders to the company are mulling an insolvency petition against it.

In the case of Reliance Infrastructure, lenders have signed an inter-creditor agreement but a resolution plan is yet to be finalised. Mumbai Metro One Pvt. Ltd., where Reliance Infrastructure holds stake, is currently undergoing restructuring under a resolution plan approved by the lenders.

In the case of Reliance Power, its lenders are currently mulling a restructuring proposal for its gas-based power plant at Samalkot, where the approximate debt is at Rs 4,000 crore. The total liabilities for the group’s power arm stands at over Rs 30,000 crore as on June 30.

Reliance Communications is undergoing insolvency proceedings.

An email sent to Reliance Home Finance last Tuesday seeking details of its proposed resolution plan was not answered.