Fitch downgrades RCom; says default a real possibility

Fitch today downgraded telecom operator Reliance Communications to junk grade saying loan default is a "real possibility" and red flagged its poor liquidity and excessive refinancing risk.

The latest action by the credit rating agency comes on the heels of a downgrade by other rating agencies such as Moody's Investors Services, ICRA and CARE, and is expected to add to financial woes of the Anil Ambani-owned telecom firm that is straddled with Rs 44,000 crore net debt.

As it is, RCom stock has been battered over the last few days amid doubts over the telecom operator's loan repayment capability.

"Fitch Ratings has downgraded India-based Reliance Communications Limited's Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) to 'CCC' from 'B+'," the agency said.
 

Any issuer default rating which falls below 'B' grade becomes junk in ratings parlance.

"RCom's rating downgrade reflects Fitch's belief that some kind of default is a real possibility," a Fitch statement said.

In a regulatory filing, RCom said it expects to meet all its debt repayment obligations and substantially reduce overall debt, based on the large number of approvals already received for the two transactions and good progress for the balance.

The company further said that the proceeds from the two deals would be sufficient to cover not only all scheduled repayments, but also include substantial pre-payments to all lenders on a prorata basis.

The US-based agency has flagged poor liquidity, excessive refinancing risk, "compromised" business model and delays in deal execution as key reasons for the downgrade.

"At end-March 2017, cash and equivalents were Rs 14 billion (Rs 1,400 crore) - insufficient to pay for short-term debt of INR 109 billion (Rs 10,900 crore)," Fitch said.

Noting that RCom's EBITDA declined by 30 per cent in FY17, Fitch said that in the current financial year this would not be sufficient to cover the annual interest cost and maintenance capex requirements.

The earnings before interest, tax, depreciation and amortisation or EBITDA is a measure of any company's operating performance.

"The rating action reflects Fitch's assessment that short -term liquidity has deteriorated to a position where credit risk is very high," Fitch warned.

Fitch considers that Rcom's business model is "compromised in the highly price-competitive market" due to the high level of debt and loss of market share to competitors with greater resources.

"Its capital structure is unsustainable and it has excessive refinancing risk given that we expect cash generation may decline," it said.

The debt-laden company has been reeling under a slew of rating downgrades over the last few days, and its stock have tanked amid reports that the firm failed on its debt serving obligations towards 10 or more local banks.

The company, last week, had reported its first annual loss since its inception of Rs 1,283 crore for fiscal ended March 2017, against a net profit of Rs 660 crore in 2015-16.

Its loss during March quarter stood at Rs 948 crore compared to a net profit of Rs 79 crore in year-ago period, hurt by the intense price war unleashed by newcomer Reliance Jio, owned by elder brother and India's richest man Mukesh Ambani.

In the days that followed, Moody's Investors Service downgraded RCom's corporate family rating and senior secured bond rating citing weak performance and "fragile" liquidity position of the company.

As per rating agency ICRA, the debt protection metrics of RCom have further deteriorated with increase in debt and weakening in profitability.

RCom, however, has been trying to assure investors and lenders that it would repay Rs 25,000 crore before September 30 this year post completion of its two deals - sale of its tower business (to Canada's Brookfield) and merger of its wireless business with Aircel.

RCom Chairman Anil Ambani may address the media soon on some of these critical issues, as part of efforts to soothe investors' frayed nerves over its debt repayment plans.