Moody’s lowers rating of Anil Ambani’s RCom, here’s why it did it

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New Delhi | Published: April 8, 2016 8:47:13 AM

Moody's Investors Service has changed the outlook of Reliance Communications (RCom) to negative from stable as there are persistent delays in the company's sale of non-core assets.

Reliance Defence, Anil AmbaniMoody?s said the negative outlook reflects its view that ongoing delays in Reliance Com?s rollout of the deleveraging plans will keep the operator?s financial and credit profile strained over the near term. (Reuters)

Moody’s Investors Service has changed the outlook of Reliance Communications (RCom) to negative from stable as there are persistent delays in the company’s sale of non-core assets.

Moody’s said the negative outlook reflects its view that ongoing delays in RCom’s rollout of the deleveraging plans will keep the operator’s financial and credit profile strained over the near term.

“The change in outlook to negative from stable reflects persistent delays in the company’s sale of non-core assets, which underpins its deleveraging strategy. As such, there is unlikely to be material improvement in leverage as well as associated liquidity and refinancing pressures over the next 6-9 months, even if the company announces a binding tower sale transaction this quarter,” says Nidhi Dhruv, Moody’s Vice-President and Senior Analyst.

Furthermore, Moody’s said the negative outlook encapsulates expected changes in the key terms of the transaction — including valuation, which in its view could be up to 20-25 per cent lower than its earlier estimates of USD 3.4 billion.

The ratings agency said that upon completion of the share swap transaction with Sistema Shyam Teleservices (SSTL), RCom will have adequate spectrum.

However, should the company participate in the upcoming spectrum auction, its leverage metrics will be further pressured.

“RCom continues to have a strained liquidity profile… There is also an ongoing need to refinance upcoming debt maturities, including USD 450 million in debt falling due in the quarter ending June 30, 2016,” Dhruv added.

Moody’s is of the view that had the tower transaction closed within the original set timelines, the proceeds from the sale could have been used for debt repayments, and its expectation is that the resultant reduced leverage will alleviate pressure on covenants.

The agency said RCom is pursuing restructuring of its wireless activities. In December 2015, the company announced that it had entered into exclusive discussions with Aircel for a potential combination of businesses.

“This deal is yet to close and on March 23, 2016, the company announced that it had extended the exclusivity period by 60 days to May 2016,” it said.

While assigning RCom’s ratings in March 2015, Moody’s forecast incorporated the company’s articulated deleveraging plans, which were largely premised on the sale of its non-core assets, primarily its sub-sea cable subsidiary GCX Limited), its direct-to-home (DTH) cable business and property assets in Mumbai and Delhi.

However, Moody’s believes RCom is currently not pursuing the GCX sale and the DTH business as the deleveraging strategy hinges on tower disposal and merger of the wireless business.

The rating agency noted some positive developments over the last 3 months relating to finalisation of spectrum trading and sharing agreement with Reliance Jio Infocomm and imminent completion of the share swap with SSTL.

“Benefits of spectrum agreement will start accruing to RCom with transition of its CDMA subscribers to LTE. However, meaningful financial and operational benefits will only accrue upon the yet to be commercially launched 4G services by Reliance Jio,” it added.

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