RCom’s leverage metrics will be further pressured if it participates in auctions: Moody’s

By June 3rd, 2016 AT 4:22 PM

Ratings firm Moody’s Friday said that Reliance Communications (RCom) outlook will remain negative but the company’s FY 2015-16 results can be accommodated in its Ba3 corporate family rating and senior secured rating. RCom’s consolidated revenues for Q4 ended March 2016 were up 3.8% year-on-year (YoY) to around Rs 59 billion. Revenues from India operations, — the largest contributor — were up 6.5% over the same period. In India, a decline of 8%YoY in voice revenue in 4Q 2016 was offset by a 27% increase on non-voice revenues.

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At the same time, RCom’s global operations– accounting for approximately 19% of total revenues — reported a 4% decline in revenues in 4Q 2016. For the full year ended 31 March 2016 (FY2015-16), the company reported broadly stable revenues at Rs 221 billion, due mainly to its cancellation of licenses in five circles earlier this year.

“RCOM reported EBITDA of around Rs 74 billion, with its EBITDA margin decreasing by 0.4% over the previous year to 33.6%. The decline in EBITDA margin is in line with Moody’s expectation, owing to increased contribution of data revenues and higher customer acquisition costs,” Nidhi Dhruv, a Moody’s Vice President and Senior Analyst, said in a statement.

Moody’s estimates RCom’s adjusted, consolidated debt/EBITDA was around 6.3x for the year ended 31 March 2016, compared to 5.3x last year. This increase in leverage is notably due a Rs 38 billion increase in reported debt and the inclusion of Rs 33 billion deferred spectrum liabilities. Upon the completion of the share swap transaction with Sistema Shyam Teleservices (SSTL unrated), RCom will have adequate spectrum.

“However, should the company participate in the upcoming spectrum auctions, its leverage metrics will be further pressured,” the agency said.

RCOM has about $450 million in debt falling due in the quarter ending 30 June 2016, which includes a $350million ECB facility at Reliance Infratel (unrated), which is guaranteed by RCOM and has a cross-default with other debt. Management is still in the process of renewing this facility with the banks and expects to complete the refinancing ahead of maturity.

Failure in obtaining final renewal approvals from the banks will lead to imminent ratings downgrade, which would be more than one notch.

“There have also been further delays in the RCOM’s deleveraging plans. In December 2015, the company announced that it had entered into exclusive discussions with Aircel Limited (unrated) for a potential combination of businesses. This deal has yet to close and RCOM has extended the exclusivity period for its discussions with Aircel by another 30 days to 22 June 2016,” added Dhruv, also Moody’s Lead Analyst for RCOM.

In December 2015, RCOM entered into a non-binding and exclusive agreement to sell towers owned by its subsidiary— Reliance Infratel Limited (RITL, unrated)—to two investment companies, Tillman Global Holdings, LLC (unrated) and TPG Asia, Inc (unrated). RCOM has made a public commitment to use the entire proceeds from the sale for debt reduction.

“RCOM has also re-prioritized its strategies again, and now plans to announce the final binding tower sale transaction within two months from the completion of discussions with Aircel. This is a significant delay from our earlier expectations for the tower transaction to be confirmed within the June quarter,” Dhruv said.

Cumulatively, these transactions, when consummated, could benefit RCOM substantially. “However, in our view, changes in the company’s strategy continue to delay execution of its plans. Hence any tangible benefit to RCOM’s financial and credit profile will now be delayed for at least 6-9 months,” the agency said.

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