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As RCom Defaults on Dollar Bonds, All Eyes on India's Debt Recovery and Insolvency Process

THE WIRE 2017-11-14 22:25:01

With a net debt of 443 billion rupees as of end-March, RCom is the most leveraged among listed Indian telecom companies.

RCom has reported a quarterly loss of Rs 27.09 billion. Credit: Reuters

New Delhi: Debt concerns continue to mount at Reliance Communications with the Anil Ambani-owned telecom operator recently missing interest payments on two outstanding domestic non-convertible debentures and failing to pay a coupon on its 2020 dollar notes.

Its default on US dollar bonds is the first by an Indian company in the last 15 months and, according to international creditors and investment analysts, represents an interesting test-case scenario of how useful India’s new insolvency and bankruptcy code could be for offshore bondholders and creditors.

As Bloomberg reported on Tuesday, under the new rules, bondholders can now force defaulters to come up with a debt resolution plan. Once this happens, if the company fails to present a plan within 270 days, it will face liquidation.

However, senior investment analysts The Wire spoke to indicated that it was unlikely that international creditors would exercise this option at the moment.

“What is likely is that the company will start talking to bond investors. Once you roll the dice and file an action in court, there’s no taking it back. What’s important above all is recovery prospects, which is what will be weighing on people’s minds,” a senior corporate lawyer, whose firm is helping state-owned banks grapple with RCom’s debt, said.

Senior Indian banking officials The Wire spoke to also indicated that an immediate fallout of the dollar bond default would be an implicitly greater scrutiny of how well domestic lenders have been pushing through the company’s strategic debt restructuring (SDR) plan.

After Reliance’s merger deal with Aircel was called off, the company suggested that Indian banks convert Rs 7,000 crore of debt into equity; after the conversion, domestic lenders would have a 51% stake in the company after conversion.

However, in the last week, this process has hit road-bumps over the conversion price and the company’s insistence on priority status being given to loans that it borrowed from the promoter group.

“If offshore creditors take action under the insolvency and bankruptcy code it will force RCom to come up with a debt recovery plan not just for domestic lenders, as it already has, but for all of its creditors. It will place greater emphasis on how well the domestic process is going and also test how well the new resolution process works for international investors,” a senior bank official, who declined to be identified, told The Wire.

Reuters reports

Over the weekend, the firm posted its fourth straight quarterly loss and said it failed to pay interest on some debentures, sending the debt-laden firm’s shares tumbling 14% to a record low and its bonds down on Monday.

The telecom company, which was once the second largest firm in the larger telecom industry, on Saturday reported a quarterly loss of 27.09 billion rupees compared with a profit of 620 million rupees a year ago.

Revenue nearly halved to 26.67 billion rupees amid a price war started by upstart rival Reliance Jio, which is backed by Anil’s elder brother Mukesh Ambani.

RCom, as the company is widely known, also said in a securities filing over the weekend that it has missed interest payments on two outstanding domestic non-convertible debentures.

The loss and missed payments make a recovery for RCom that much harder and come at a time when there are doubts about a previously flagged debt-restructuring plan. With net debt of 443 billion rupees as of end-March, RCom is the most leveraged among listed Indian telecom companies.

After its previous plan to cut debt by selling towers to Canada’s Brookfield and merging its wireless business unit with rival Aircel fell apart, RCom came up with a new plan last month pledging to repay a total 270 billion rupees from new deals for its towers, infrastructure assets, and real estate.

It has yet to finalise buyers for any of the assets it is planning to sell. As part of the latest plan, the company has said banks will convert about 70 billion rupees of its debt to equity under the central bank’s strategic debt restructuring plan.

The debt-equity conversion plan may, however, run into trouble as bankers and RCom are at loggerheads over the treatment of loans which RCom has taken from its group companies, the Economic Times reported on Sunday.

The company declined to comment on that story but pointed to comments from its executive director Punit Garg, who in late October said he was confident the strategic debt restructuring plan would proceed.

As part of the deal with banks, RCom says it has won a reprieve on payments to lenders until December 2018. Shares in the company fell as much as 14.2% on Monday and were down 11.4% at 0750 GMT.

Its overseas bonds also dipped on Monday, with RCom’s 6.5% bonds due 2020 indicated at 35/37 cents on the dollar. The bonds have trended sharply lower in the last six weeks as RCom’s woes have mounted.