June 6, 2017 / 1:52 PM / 2 months ago

Fitch Downgrades Reliance Communications to 'RD'; Bond to 'C/RR4'

12 Min Read

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, June 06 (Fitch) Fitch Ratings has downgraded India-based Reliance Communications Limited's (Rcom) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'RD' from 'CCC'. Fitch has also downgraded the rating on Rcom's USD300 million 6.5% senior secured notes due 2020 to 'C/RR4' from 'CCC/RR4'. The downgrade follows Rcom's 2 June 2017 announcement that all of its bank lenders are prepared to waive debt service obligations until end-2017 to provide time for the company to lower its debt through two proposed transactions and present a plan demonstrating how the debt can be serviced over the long term. Under our rating definitions this situation constitutes a restricted default, as multiple waivers or forbearance periods have been extended in parallel following a non-payment event. KEY RATING DRIVERS Critical Liquidity Position: Rcom had poor liquidity at end-March 2017, with cash and equivalents of INR14 billion - insufficient to pay short-term debt of INR109 billion. Rcom's EBITDA declined by 30% to INR49 billion in the financial year to end-March 2017 (FY17), from INR71 billion in FY16, and is likely to be insufficient in FY18 to meet annual interest costs of INR35 billion and maintenance capex of INR15 billion. The company's management say that it will meet its coupon obligation due on 6 November, and there will be no cross-default prospect while the banks loans are in standstill; under the bond documents, non-payment of the bank loan may trigger a cross-default under the bond documents if such non-payment continues for 30 days following written notice from either 25% of the bondholders or the bond trustee. Deal Execution Risks: We believe weakening cash generation in the Indian wireless sector may hamper Rcom's plan to sell 51% of its tower business, Reliance Infratel Ltd. Reliance Infratel will have significant cash flow exposure to the proposed 50:50 wireless joint venture (JV) between Rcom and Aircel which faces merger execution risk as well as tough market conditions, although the JV's other tenant Reliance Jio is backed by Reliance Industries, rated 'BBB-'/Stable. Even if the tower business and wireless JV transactions occur and debt is paid down, we believe the residual business is likely to be saddled with excessive debt. The transactions are subject to approval from lenders, shareholders and the Indian telecom regulator. The standstill provides Rcom with seven months to complete the transactions. During this time, Rcom will also provide a sustainable long-term plan to service its remaining debt of at least INR200 billion. According to Rcom, the standstill requires lenders' formal approval, which, given the company's critical liquidity, we expect to be obtained. DERIVATION SUMMARY Under our rating definitions the standstill constitutes a restricted default as multiple waivers or forbearance periods have been extended in parallel following a non-payment event. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Delays in executing tower sale and demerger of wireless unit, leading to inadequate liquidity to pay short-term debt. - Analytical deconsolidation of wireless JV, Infratel and subsidiary Global Cloud Xchange (GCX) businesses because of their inability to provide cash to support Rcom's creditors. - The wireless JV, Infratel and GCX do not require equity from Rcom. - Sale of 51% ownership in Infratel to lower debt by INR110 billion. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action -Improvement in Rcom's liquidity position such that it can pay its short-term obligations. Developments that May, Individually or Collectively, Lead to Negative Rating Action -Rcom entering into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedures, or otherwise ceasing business. LIQUIDITY Poor Liquidity: Cash and equivalents were INR14 billion at end-March 2017 - insufficient to repay short-term debt of INR109 billion. The standstill helps liquidity in the short term, although the company will not be able to meet its obligations unless execution of the transactions is successful. Contact: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd. 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