Things are looking up for investors in billionaire Anil Ambani’s Reliance Communications Ltd. after the Indian phone company staved off insolvency by agreeing to sell assets to the chairman’s brother. But lenders still face a potential hit on their earnings. That’s the view of some observers including Pavitra Sudhindran, credit analyst at Nomura Holdings Inc., who warns that provisions connected with nonperforming loans could sting. “That could hurt their earnings, though we don’t know the extent of the provisions they have already made and are yet to make,” she said.
Such a development would underscore the challenges creditors to Ambani’s company still face, even after his brother Mukesh, India’s richest man, agreed last week to buy spectrum, mobile phone towers and fiber assets. The firm, which defaulted on its dollar bonds in November, said last week that there would be “zero loan write-offs” for lenders and bondholders. But creditors face several uncertainties, including the exact valuation of the deal with Mukesh, the timeframe over which the proceeds would be received, and how the proceeds would be divided among various creditors, according to a Nomura research note on Tuesday. A Reliance Communications spokesman was unable to immediately comment.
Reliance Communications debt totaled almost $7 billion as of the end of the fiscal year ended March. Debts were nine times earnings, or the second-highest ratio among Asian phone companies, according to data compiled by Bloomberg. The banking sector will have to make additional provisions of at least 10 percent of their exposure to Reliance Communications for the quarter ended December if it is classified as a nonperforming asset, according to the central bank’s asset classification rules.
“The Indian banking industry is going to see a spike in corporate NPAs and credit costs on account of this single company in the quarter ended December 2017,” according to a note published last week by analyst Hemindra Hazari on Smartkarma research platform.