June 7, 2017 5:33 pm JST

Reliance Communications shares tank after rating downgrades

Fitch skeptical of plan to cut debt via wireless merger, sale of tower unit

ROSEMARY MARANDI, Nikkei staff writer

MUMBAI -- Reliance Communications shares slipped nearly 4% on Wednesday, after ratings agencies downgraded the Indian telecommunications company over concerns about liquidity and debt repayment.

Fitch cut RCom's long-term foreign- and local-currency issuer default ratings to RD, or restricted default -- its lowest grade. Moody's assigned its second-lowest grade, Ca, to the company's corporate family and senior secured bonds. Moody's said the outlook for the company is negative.

RCom shares ended 3.73% lower on the Bombay Stock Exchange, at 19.35 rupees.

The downgrades came after RCom assured shareholders that lenders were ready to give it until December to lower its debt through the merger of its wireless business with Aircel and the sale of tower operations to Brookfield Infrastructure.

The two deals are expected to lighten the debt load by 250 billion rupees ($3.87 billion).

"The said amount will cover not only all scheduled repayments, but also include substantial prepayments to all lenders on a pro-rata basis," the company said.

Fitch was not convinced. The agency said that weaker cash generation in the Indian wireless sector may hamper the plan by RCom to sell 51% of the tower business, Reliance Infratel.

"Reliance Infratel will have significant cash flow exposure to the proposed 50:50 wireless joint venture between Rcom and Aircel, which faces merger execution risk as well as tough market conditions, although the [joint venture's] other tenant, Reliance Jio, is backed by Reliance Industries, rated BBB-/Stable," Fitch said.

"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."

According to Fitch, RCom had poor liquidity at the end of March, with cash and equivalents of 14 billion rupees -- insufficient to pay short-term debt of 109 billion rupees.

Its operating profit declined by 30% to 49 billion rupees during the latest financial year, from 71 billion rupees the previous year. Fitch suggested the company's performance in the current fiscal year is unlikely to be strong enough to cover annual interest costs and maintenance capital expenditure.

RCom's second straight quarterly loss for the three months ended March, announced recently, was a sign of the fallout from competitor Reliance Jio Infocomm, which has introduced free voice calls and ultralow data fees. Other players, such as Bharti Airtel, Vodafone India, and Idea Cellular, have also felt the impact.

RCom said it lost 3 million customers in the last quarter because it "did not participate in the unlimited prepaid voice segment, because it was value negative for the company. We rather focused on a profitable subscriber base and profitable growth."

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