New Delhi: Anil Ambani’s Reliance Communications (RCom) this week finally outlined a plan to cut its debt by by around Rs 39,000 crore, mostly on the back of the sale of assets for which the company claimed some non-binding offers had already been made.
And yet, multiple bankers and ratings analysts describe the outcome of the strategic debt restructuring (SDR) process – which was invoked in June 2017 after RCom missed interest payments, prompting two credit rating agencies to downgrade its debt to default – as still uncertain.
The telecom company, which has a debt of nearly Rs 45,000 crore, currently plans on reducing this to Rs 6,000 crore by March 2018. Several bankers, however, feel that the timeline may be longer.
The repayment plan RCom presented this week will reportedly involve “zero write-offs” for lenders and will see Rs 25,000 crore in debt cut through prepayment after asset monetisation and transfer of spectrum liabilities. A further Rs 10,000 crore will go towards “non-recourse long-term debt” to a special purpose vehicle that will be set up to develop land parcels at Dhirubhai Ambani Knowledge City in Mumbai.
The new debt resolution plan provided by Ambani is not very different from the previous one, and is just a way of “kicking the can down the road”, Fitch Rating’s Nitin Soni told Bloomberg Quint.
According to Soni, a director at the ratings agency, RCom has a “long-standing problem” of coming up with resolution plans followed by patchy implementation. This has been going on for the last two years and has prompted Fitch to suspend its coverage on the company, he added.
Senior bankers The Wire spoke to admitted that factors that had been in play when SDR was invoked had slowly fizzled out.
“SDR was invoked to buy time for both us and the company. It was to solidify time to find buyers for assets while obviously giving us an option to convert debt to equity at a more favourable price after these transactions were completed,” a senior executive of a public sector bank, who declined to be identified, said.
When the SDR was invoked, RCom had firm plans to move ahead with the sale of its wireless and telecom tower businesses (which put together represented nearly 70% of the company’s total revenue) – through a merger with Aircel and a majority stake sale of its towers business to Canada’s Brookfield Group.
Lenders expected the proceeds from both these transactions to reduce RCom’s debt by nearly 60% or Rs 25,000 crore.
In October 2017, however, these calculations were thrown into disarray with the Aircel merger being called off a year after it was first announced due to “legal uncertainties” and “intervention by vested interests”. This in turn, industry sources said, had negative consequences for the Brookfield deal (which was initially signed at a Rs 11,000 crore valuation in December 2016) as it had to be reworked and revised downward to reflect the loss of Aircel’s tenancies.
These two developments prompted RCom management to suggest that Indian lenders (which had around Rs 35,000 in exposure) to convert Rs 7,000 crore of debt into equity, which would give them a 51% stake.
These negotiations turned tense in November and were ultimately unsuccessful because the company wanted a conversion rate of Rs 24.71-Rs 24.73 – even though by that time the market rate for RCom’s shares was Rs 14-15.
What added to the problem at the time, industry sources say, is that most Indian public sector banks were hesitant to invoke the insolvency process as it would require lenders to comply with higher provisioning requirements (50% for secured exposure and 100% of unsecured exposure).
What further complicated things, on top of this, however, was the fact that other creditors who had come to collect their own dues.
“At that time, multiple other creditors such as China Development Bank had taken the company to the National Company Law Tribunal (NCLT). If we converted our debt to equity it would have meant that we would have to appear in the NCLT court as a financial investor who owned 51% stake in the company,” a person who participated in the lender’s consortium discussion, told The Wire.
“Ultimately, even two weeks ago, there was no agreement on the price at which we could convert debt to equity as the company’s market cap was much lower than when SDR started,” the person added.
Also read: As RCom Defaults on Dollar Bonds, All Eyes on India’s Debt Recovery and Insolvency Process
In this week’s press conference, Ambani alluded to having made a trip to Beijing and stated that the company had reached “an out-of-court settlement with China Development Bank.”
What happens now?
With RCom formally exiting the SDR process, banking sources say, it will have to be declared a non-performing asset (NPA).
There are different opinions on when exactly this will happen. A senior official at State Bank of India, who declined to be identified, told The Wire that if the Anil Ambani firm misses another interest payment of Rs 1,300 crore by December 31, the account will be classified as an NPA.
R. K. Takkar, Managing Director of UCO Bank, whose exposure to the telecom firm stands at around Rs 3570 crore, has stated that RCom will move out of SDR only after its “monetisation process takes a concrete shape” and that once the firm exits the SDR process it will be classified as an NPA.
UCO will have to make a 15% provision for the debt-ridden account. While Ambani stated that the whole asset monetisation process will be finished by March 2017, Takkar has indicated that the process could take longer, with monetisation of only one or two of RCom’s divisions taking place in the next three months.
Several bankers The Wire spoke to, however, maintained that this time around RCom’s asset monetisation process was “more serious”, having being vetted by investment bankers with several non-binding offers in place.
Who could be potential buyers? As The Wire reported, Mukesh Ambani-controlled Reliance Jio is interested in the company’s spectrum assets, while other media reports state that the Chinese lenders are “likely to get a significant shareholding” in the SPV set up to develop the DAKC land in Mumbai.
Whether the non-binding offers are enough for RCom to completely monetise its assets remains to be seen.