Moody's changes outlook on Reliance Communication's Ba3 ratings to negative

Moody's Investors Service has affirmed Reliance Communications' (RCOM) Ba3 corporate family rating and senior secured rating.

Moody's has also changed the ratings outlook to negative from stable.

List of affected ratings:

Rating Affirmations:

..Issuer: Reliance Communications Limited

... Corporate family rating, affirmed at Ba3

Senior secured rating, affirmed at Ba3

Outlook Actions:

..Issuer: Reliance Communications Limited

....Outlook changed to negative from stable

Ratings Rationale

"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 a 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, a Moody's Vice President and Senior Analyst

Furthermore, the negative outlook encapsulates expected changes in the key terms of the transaction -- including valuation which in our view could be up to 20-25% lower than our earlier estimates of $3.4 billion.

Assuming a lower transaction value, adjusted leverage will decrease to about 4.0x-4.5x in the fiscal year ended 31 March 2018 (compared with 3.5x-4.0x in our earlier expectations) from 6.2x as of end-2015.

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.

"RCOM also continues to have a strained liquidity profile, with the company remaining reliant on recurring covenant waivers due to its high leverage. There is also an ongoing need to refinance upcoming debt maturities, including $450 million in debt falling due in the quarter ending 30 June 2016. This includes a $350 million ECB facility at Reliance Infratel (unrated), which is guaranteed by RCOM and has a cross-default with other debt," adds Dhruv, also Moody's Lead Analyst for RCOM.

Had the tower transaction closed within the original planned timelines, the proceeds from the sale could have been used for debt repayments, and our expectation was that the resultant reduced leverage would alleviate pressure on covenants.

Moody's notes that RCOM has initiated discussions with banks for refinancing its upcoming maturities although the facilities are yet to be agreed on. Any delay in obtaining final approvals from the banks will lead to imminent ratings downgrade, which would be more than one notch. However, in our view, the probability of this occurring is very low.

In addition, RCOM is pursuing a restructuring of its wireless activities. In December 2015, the company announced that it had entered into exclusive discussions with Aircel (unrated) for a potential combination of businesses. This deal has yet to close and on 23 March 2016, and the company announced that it had extended the exclusivity period by 60 days to May 2016.

"Cumulatively, these transactions, when consummated, could benefit RCOM substantially. However, in our view, changes in the company's strategy have led to significant delays in 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, which is beyond Moody's tolerance levels for its Ba3 rating," says Dhruv.

When Moody's assigned RCOM's ratings in March 2015, the 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 (B2 stable), 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 is now hinged on tower disposals and the merger of the wireless business.

RCOM has received cash proceeds of about INR3.3 billion ($50 million) through property sales, which represents less than 20% of Moody's initial expectations.

There have been some positive developments over the last 3 months, relating to finalization of the spectrum trading and sharing agreement with Reliance Jio Infocomm (R Jio, unrated) 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 R Jio.

The negative outlook reflects our view that ongoing delays in RCOM's rollout of its deleveraging plans will keep its financial and credit profile strained over the near term. Moody's will closely review the progress on RCOM's stated plans over the next 6-9 months.

The ratings could be downgraded if RCOM (1) experiences a significant deterioration in market share and/or competition intensifies, such that profitability deteriorates; (2) fails to execute its deleveraging plans in a timely manner; (3) encounters difficulty in complying with its financial covenant requirements, accessing capital to fund growth or repaying/refinancing debt, as and when it falls due; or (4) implements aggressive investment and/or shareholder return policies.

Specific indicators that Moody's would consider for a downgrade include: (1) adjusted debt/EBITDA failing to trend in line with expectations towards 4.0x by end-2016; (2) adjusted EBITDA margins falling below 30%; and (3) adjusted funds from operations + interest)/interest remaining below 3.0x.

Furthermore, any unexpected regulatory developments in the Indian telecommunications sector will also be negative for the rating.

Given the negative outlook, an upgrade is unlikely over the near term. However, the outlook could stabilize should RCOM (1) continue to grow its revenues and earnings of its core-Indian operations by increasing the number of subscribers and data revenue without compromising its EBITDA margins; (2) continues to generate positive free cash flow on a sustained basis; and (3) improve its liquidity profile significantly.

Specific indicators that Moody's would consider for stabilizing the outlook include: adjusted debt/EBITDA at 4.0x-4.5x; adjusted EBITDA margins between 30%-35%; and adjusted funds from operations + interest/interest over 3.0x on a sustainable basis.

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