At the same time, the ratings are under review for further downgrade.
RATINGS RATIONALE
"The downgrade reflects RCOM's weak operating performance, high leverage and fragile liquidity position. The company's reported EBITDA has fallen 29% year-over-year, evidencing its weak market position and contracting subscriber base," says Annalisa DiChiara, a Moody's Vice President and Senior Credit Officer.
On 27 May, RCOM reported an 11% YoY decline in revenues and a 29% contraction of EBITDA to INR53.9 billion ($830 million) for full year ending 31 March 2017 from INR76.3 billion ($1.2 billion) a year ago, while its EBITDA margin dropped to 27.0% from 34.2% over the same period. RCOM's weak operating results reflect the intense state of competition, driven in turn by the free services offered by Reliance Infocomm Limited (RJio) from mid-September 2016 through 1 April 2017.
"RCOM's liquidity position is fragile. RCOM has around INR 230 billion short-term debt and current long term debt maturities through 31 March 2018. In addition, the company disclosed in its financial statements that it is still awaiting formal confirmation from lenders for waivers of certain loan covenants so the loan amount continues to be classified as a non-current liability. We believe failure to obtain could exacerbate near-term liquidity pressures," adds DiChiara.
Historically, the company has relied on short-term debt and covenant waivers from its banking relationships.
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Should the waivers not be received, this development could have significant implications for the holders of RCOM's $300 million bond, as there are cross-payments and cross-defaults for any acceleration, in each case by the issuer or any restricted subsidiary, with respect to debt in aggregate of $10 million.
Separately, the company announced that it is current on interest payments as related to its $300 million bond.
Meanwhile, as of 31 March 2017, RCOM reported cash and cash equivalents of INR10.2 billion. Together with Moody's expectation of the company's limited ability to generate free cash flow, Moody's believes this will be insufficient to cover upcoming debt maturities, absent waivers from its lenders while the company pursues the completion of its corporate restructuring.
The restructuring includes the sale of its telecommunications tower assets and the de-merger of its core wireless operations which it will merge with Aircel Limited (unrated) in a new joint venture (MergerCo).
At the same time, RCOM's consolidated debt levels continued to rise through year-end. The company reported total debt of INR457 billion at 31 March 2017, resulting in reported debt/EBITDA of 8.5x. Including its reported INR 33.2 billion of deferred payment liabilities, leverage increases further to over 9.0x.
Given the weak operating outlook and high competitive intensity of the Indian mobile sector, there is no scope for RCOM to delever, absent the successful execution of its corporate restructuring.
RCOM announced on 27 May that it will transfer around INR140 billion of balance-sheet debt and INR60 billion of deferred spectrum liabilities to MergedCo and repay an additional INR110 billion of balance-sheet debt with the proceeds from the sale of its tower assets.
However, even assuming these transactions are completed as planned, post restructuring, Moody's estimates that RCOM will have over $3.0 billion of debt remaining on its balance sheet. This total includes both RCOM's $300 million senior secured bond and a $350 million senior secured bond issued by its 100%-owned subsidiary, GCX Limited.
But GCX, which Moody's estimates will account for a significant portion of revenues post restructuring (based on Moody's estimates), is not a restricted subsidiary under RCOM's $300 million bond indenture, and therefore RCOM has no recourse to those assets or cash flows. GCX is ring-fenced from creditors at RCOM, with dividend payments currently representing the only form of cash flow stream from GCX.
GCX is able to pay dividends so long as its leverage remains below 3.75x and interest coverage above 2.25x. In addition, GCX can incur additional indebtedness under its indenture, including drawing down on its $30 million revolving credit facility.
Depending on the outcome of the restructuring process and the lender's consent process, Moody's will also further evaluate the RCOM's business risk position, business strategy, financial policies, liquidity position, and the effect these have on its credit profile. The cash flow-generating capabilities of some of RCOM's remaining businesses namely the enterprise and fiber optic business segments remain unclear.
Moody's review will focus on: (1) timely progress in RCOM's announced transactions, including regulatory approvals and processes related to lender and bondholder consents, as required, for the de-merger of the wireless business and the sale of its tower assets; (2) assessing the credit quality and financial strength of the remaining businesses, particularly as related to the company's enterprise and fiber optic business; and (3) assessing the effects of the proposed restructuring on the collateral package for RCOM's USD bondholders as well as the cash flow prioritization relative to other debt and cash obligations.
Further downward pressure on the ratings is possible if the company fails to address its liquidity position within the next 3 months, or fails to provide a clear refinancing plan for pending maturities over the next 12-15 months.
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