Moody's Investors Service today said that Reliance Communications' ratings will "remain on review for downgrade" despite the company signing an agreement with Canada-based Brookfield Infrastructure to sell its tower assets.
Reliance Communications' (RCom's) "B1 corporate family and senior secured ratings remain on review for downgrade despite signing a binding agreement with Brookfield Infrastructure (unrated) in relation to the sale of RCom's tower assets," a Moody's statement said.
Its "Corporate Family Ratings (CFRs) are long-term ratings that reflect the relative likelihood of a default on a corporate family's debt and debt-like obligations and the expected financial loss suffered in the event of default. Obligations rated 'B' are considered speculative and are subject to high risk," Moody's said.
Yesterday, RCom signed binding agreements to sell 51 per cent stake in its tower business to Canada-based Brookfield Infrastructure and its institutional partners for Rs 11,000 crore.
The assets will be transferred from RCom's subsidiary, Reliance Infratel, into a separate new company to be owned and independently managed by Brookfield Infrastructure.
At the same time, RCom will receive class B non-voting shares in the new tower company providing a 49 per cent economic upside interest in the tower business based on certain performance conditions.
But Moody's pointed out that no clarity had been provided with regard to the nature of the "conditions".
"While the signing of a binding agreement is credit positive, the ratings remain under review for downgrade, because of RCom's announced transactions -- demerger of its wireless business and sale of its telecommunications tower assets, which will likely result in a structural reorganisation across the group, and recalibration of the credit risk for bondholders," Moody's said
Both transactions are subject to approvals - including from shareholders, regulators and bondholders - which are expected to take 6-9 months to complete, it added.
"Moreover, there is still a lack of clarity on the cash flow generating capabilities of some of RCom's remaining businesses - namely the enterprise and fiber optic business segments - because the resulting leverage or cash flow positions following its restructuring can only be estimated within wide bounds," Moody's said.
Moody's said its review will focus on timely progress in RCom's transactions, including regulatory approvals and processes related to lender and bondholder consents, for the demerger of the wireless business and the tower asset sales.
Other parameters include assessing credit quality and financial strength of remaining businesses, particularly related to the enterprise and fiber optic business, and assessing effects of proposed restructuring on collateral package for RCom's bondholders, it said, adding that RCom's residual business strategy will also be evaluated.