RCom and Aircel had in September last year signed a binding agreement to merge their mobile businesses. But, on Sunday, RCom announced that the agreement had lapsed owing to legal and regulatory uncertainties, objections by interested parties and delays in receiving relevant approvals.
"Cancellation of the merger is credit negative for RCom because the merger was crucial to a debt reduction plan the company agreed to with its lenders and which also included disposal of tower assets," Moody's said.
RCom has said it continues to pursue the sale of its tower assets, although it did not provide an update on the process.
RCom and Aircel, a unit of Malaysia-based Maxis Communications Bhd, were due to complete the merger this year to create India's fourth-largest telecom firm.
While Aircel was one of the several possible transactions that Ambani was pushing for to reduce RCom's debt, the company said on Sunday that it will consider an alternate plan to cut debt, which includes sharing and trading of its spectrum or airwaves valued at about Rs 19,000 crore.
Monetising its real estate, tower and fiber businesses are also under consideration.
"In conjunction with the merger, RCom expected its debt to decline by Rs 14,000 crore with the transfer of bank debt and Rs 6,000 crore of spectrum liabilities to the new merged entity.
"Because the merger has failed, RCom's debt levels will remain elevated and leverage, as measured by adjusted debt/EBITDA, will remain above 9.0x," Moody's said.
RCom's reported debt totaled Rs 45,700 crore at March 31, 2017, including a USD 300 million senior secured bond due on November 6, 2020 and a USD 350 million senior secured bond issued by its 100 per cent-owned subsidiary, GCX Limited that is due on August 1, 2019.
Moody's said because GCX is not a restricted subsidiary under RCom's USD 300 million bond indenture, GCX assets and cash flows are ring-fenced from RCom creditors.
In June, RCom's lenders agreed to consider a strategic debt restructuring. As part of this process, the company received a standstill on its obligations' debt servicing through December 31, 2017, by which time the merger with Aircel and sale of 100 per cent of its tower assets were to have been completed.
If the transactions are not completed, the lenders can exercise their right to convert their debt into equity and take over management of the company.
RCom has stated that it has since extended the standstill deadline to December 31, 2018.
The company did not provide a status update of its agreement to sell 100 per cent of its tower assets and related infrastructure to Brookfield Infrastructure Partners LP for Rs 11,000 crore, Moody's said.
"Our negative outlook on RCom's rating reflects the ongoing uncertainty regarding the company's ability to generate cash flow, corporate and debt-restructuring progress and the resultant recovery prospects for both lenders and bondholders," it said.
Also, any failure to meet the proposed restructuring timetable or to remain current on the interest payable on RComs' USD 300 million bond or GCX's USD 350 million bond will adversely pressure ratings, it said.
According to management,these bonds are excluded from the debt standstill agreement in place.