Moody’s placed under “review for downgrade” the credit rating of Reliance Communications today, a day after RCom’s announcement to merge its wireless telecom business with smaller rival Aircel.
In the largest consolidation in the country’s telecom sector, RCom and Aircel’s majority owner, Malaysia’s Maxis Communications Berhad (MCB), yesterday announced signing of definitive documents for the merger of their Indian wireless businesses.
Moody’s Investors Service VP and Senior Credit Officer Annalisa Di Chiara said: “While we view the combination of the wireless businesses positively, we will also need to re-evaluate the credit profile of RCom in conjunction with the proposed organisational and financial restructuring, as the remaining business will be smaller in scale with – in our view – a weaker business risk profile.”
Moody’s has placed under review for downgrade Reliance Communications Ltd’s Ba3 corporate family rating and senior secured rating following the announcement of its plan to merge its wireless business with Aircel Ltd and its first quarter results for the 2016-17 fiscal, it said in a statement.
India Ratings and Research however said that the merger of is a key milestone in the ongoing consolidation in the telecom sector.
Ind-Ra believes that the merger will enable the new entity RCom-Aircel to give strong competition to its peers in the backdrop of the disruption that the launch of operations by Reliance Jio Infocomm (RJio) has caused.
The combined entity RCom-Aircel will now be the third largest telecom entity in India by subscriber base, thus moving ahead of Idea Cellular Limited (Idea).
“This development coupled with RJio’s penetration strategy will spur competition and in turn push tariffs lower,” it said.
The spectrum acquisition strategy, particularly around 4G, is an important driver for the consolidation in the telecom sector, it added.
“The merged entity will offer strong competition to both Vodafone India Ltd and Idea which are weaker placed, as far as 4G operations are concerned,” it said.
Ind-Ra believes that the sector will now have five meaningful players namely, Bharti Airtel, Vodafone, RJio, Idea and the merged RCom-Aircel-Sistema (with a new brand) as the industry moves towards data driven revenues.
Meanwhile, Chiara said, a definitive agreement has yet to be signed with respect to the disposal of tower assets owned by its subsidiary, Reliance Infratel.
She also said the results for the April-June period announced along with the merger are “weak” because of the migration of customers from CDMA to 4G LTE.
“The review for downgrade will focus on assessing RCom’s deleveraging plan, especially with regard to the financial impact of the combination of its wireless businesses with Aircel and the potential tower sale,” Chiara said.
The merged entity could potentially have a revenue market share of 14 per cent, given RCom’s existing revenue market share at around 11 per cent in 2015-16 and Aircel’s 3 per cent revenue market share.
Moody’s said that while the merged company will run as a separate business to RCom, it will remain a sizeable part of the wider telecommunications group and will likely be supported by RCom in a distress situation.
“We had expected a significant reduction in RCom’s absolute debt levels — primarily through the sale of non-core assets — in support of the company’s Ba3 ratings. However, even with the merger adjusted pro forma leverage will remain above our tolerances for a Ba3 rating,” Moody’s said.
“Uncertainty around the closure of the proposed tower sale, announced in December 2015, continues to weigh on the rating,” said Di Chiara.