Fitch Ratings has downgraded India telecom operator Reliance Communications’ (RCOM) long-term foreign- and local-currency issuer default ratings (IDRs) to CCC from B+.
Fitch has also downgraded the rating on RCOM’s $300 million 6.5 percent senior secured notes due 2020 to CCC/RR4 from B+/RR4. The Rating Watch Negative on the IDRs and notes, which has been in place since December 2016, has been removed.
RCOM’s rating downgrade reflects Fitch’s belief that some kind of default is a real possibility. EBITDA declined 30 percent to INR 49 billion in the financial year to end-March 2017 from INR 71 billion in FY16, and is likely to be insufficient in the current financial year to meet annual interest costs of INR 35 billion and maintenance Capex of INR 15 billion.
KEY ASSUMPTIONS
# Delays in execution of tower sale and demerger of wireless unit to lead to inadequate liquidity to pay short-term debt
# Analytical deconsolidation of wireless JV, Infratel and GCX businesses because of their inability to provide cash to support RCOM’s creditors
# The wireless JV, Infratel and GCX businesses do not require equity from RCOM
# Sale of 51 percent ownership in Infratel will reduce debt by INR 110 billion
At end-March 2017, liquidity was poor with cash and equivalents of INR 14 billion – insufficient to pay short-term debt of INR 109 billion.
RCOM may struggle to refinance its maturing short-term debt given declining EBITDA and delays in executing asset sales. RCOM’s capital structure is unsustainable as FY17 FFO-adjusted net leverage was over 9.0x and Fitch does not expect that operating cash flows will improve.
Given its high level of debt, RCOM’s business model is compromised due to fierce price competition in the Indian mobile market. RCOM’s market position is weak and it has limited financial flexibility to invest to strengthen its position or step-up marketing costs.
Fitch has a negative outlook on the Indian telecoms market as it expects the credit profiles of the top-four telecoms to come under pressure from competition and larger Capex requirement. Competition is likely to remain intense as new entrant Reliance Jio, part of Reliance Industries, will continue to offer cheaper tariffs to gain market share from incumbents.
RCOM’s size, scale and diversity will be much smaller should the company complete the sale of its tower business and demerge the wireless unit as planned.
The residual company may have net debt and EBITDA of around $1.5 billion-$1.6 billion and $240 million-$250 million, respectively, in FY18. The financial numbers exclude those from Global Cloud Xchange, a sub-sea cable business owned by RCOM, which has covenants restricting upstreaming of cash to RCOM.
Weakening cash generation from its wireless business may hamper the plan to demerge its wireless business into a 50:50 joint venture and sell 51 percent of its tower business. Even if these transactions happen and debt is paid down, the residual business is likely to be saddled with too much debt.
