Will Reliance Communications’ Debt Rejig Work?
Refinancing existing loans is a key part of Reliance Communications’ plan to cut debt.
Borrow more to repay existing loans is part of Reliance Communications Ltd.’s plan to pare debt after lenders granted a seven-month moratorium on repayments. By the telecom operator’s own admission, it will be difficult.
The proposed sale of tower assets and merger of the wireless business with Aircel will leave the company short of Rs 14,000 crore in its effort to reduce debt by more than half. To meet the shortfall, it will look at refinancing loans worth Rs 28,000 crore that will be on the books of the merged operator after the deal is completed, said Anil Ladha, head of investor relations at RCom.
Given the current market conditions of the telecom industry and the bad loans of banks, the new entity could find it difficult to refinance such a huge amount, said independent market expert Sharmila Joshi. “It will be very tough.”
Already, creditors like China Development Bank and Ericsson India have moved the National Company Law Tribunal objecting to the asset sale, saying that the company didn’t keep them in the loop. Rating agencies downgraded its long- and short-term borrowings to default a little over a month ago after it delayed repayments on non-convertible debentures. This prompted lenders to invoke strategic debt restructuring which gives them the option to convert loans into equity. The operator has time till December to repay.
RCom is looking to lop off Rs 25,000 crore, more than half of its total loans, through the two deals. The merger will see the company transfer Rs 14,000 crore loans to the new entity and Aircel will contribute an equal amount. Yet, the only cash flow will be Rs 11,000 crore from the tower deal.
So, refinancing loans becomes a key element of its efforts to reduce debt that helped it buy time from lenders. The company acknowledged the challenge in its disclosure to exchanges.
Domestic banks are very pessimistic and averse to lend to telecom companies amid stagnant revenues with rising capital expenditures and operating costs, RCom said.
Competition has made matters worse, especially after the newest telecom operator Reliance Jio Infocomm Ltd. disrupted the market with its free services last year. RCom has been losing customers to rivals.
.jpg?auto=format%2Ccompress)
The only chance of the company successfully refinancing loans is if lenders agree to avoid a jump in provisioning. “Banks may be tempted because if they don’t, it will become a non-performing asset,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.
“The heat is more on banks to refinance than the company.”