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RCom ‘respectfully disagrees’ with Fitch and Moody’s on its credit rating

Anil Ambani-led Reliance Communications said it disagrees with the decision of agencies Moody’s and Fitch to downgrade the company’s credit rating based on its ‘standstill agreement’ with its lenders.

Shares of RCom fell 4% to Rs 19.30 on the National Stock Exchange today as a result of the ratings action yesterday.

“We respectfully disagree with the recent rating actions by both these agencies, and believe that these rating actions do not reflect the servicing track record of the Company,” the telecom operator said.

It also said that the agencies’ are concerned with only one particular bond issued by the company, which has total debt of around 45,000 cr. The company is demerging its most lucrative business and merging it with Aircel Cellular, and has promised to pay Rs 25,000 cr to its creditors once the deal is through.

“In May 2015, RCOM issued 6.5% coupon bearing USD bonds, maturing in November 2020, for an aggregate amount of USD 300 million,” RCom added. “The ratings by Moody’s and Fitch apply only to these USD bonds. ”

“The bonds have always been serviced regularly on the due dates and are fully current in servicing, as on date. The Company had stated, vide its notice to Stock Exchanges dated 24 May 2017, that the Company will continue to pay interest on the respective due dates, and the Bonds will be repaid on the due date of 6 November 2020,” it added.

It also said the bonds constitute only around 4% of the total debt of the Company.

“The Rating Agencies have not given due credit to the advanced stage of the corporate transactions (Aircel merger and Tower sale) which are expected to deleverage the Company’s balance sheet by ~USD 4 billion i.e. by ~ 60% within the next few months,” it said.

“It appears that the recent positive development of the standstill period agreed by our lenders has been viewed negatively by the Rating Agencies on certain technical grounds, while in actual fact the same directly addresses their key concerns about the short term liquidity situation,” it added.

It also reminded everyone that the company had redeemed its Foreign Currency Convertible Bonds (FCCBs) aggregating USD 1 billion in 2012 on the specified due date on maturity, at full redemption value, without a day’s delay, despite severe volatility in global markets at that time.

WHAT FITCH SAID

In its note, Fitch had noted that RCom is under ‘restricted default’ on its loans after negotiating a ‘standstill agreement’ with its lenders.

“The company’s management say that it will meet its coupon obligation due on 6 November, and there will be no cross-default prospect while the banks loans are in standstill; under the bond documents, non-payment of the bank loan may trigger a cross-default under the bond documents if such non-payment continues for 30 days following written notice from either 25% of the bondholders or the bond trustee.”

The agency also raised concerns about the deterioration of the company’s financial condition and the high level of competition in the market.

“We believe weakening cash generation in the Indian wireless sector may hamper Rcom’s plan to sell 51% of its tower business, Reliance Infratel Ltd. Reliance Infratel will have significant cash flow exposure to the proposed 50:50 wireless joint venture (JV) between Rcom and Aircel which faces merger execution risk as well as tough market conditions, although the JV’s other tenant Reliance Jio is backed by Reliance Industries. Even if the tower business and wireless JV transactions occur and debt is paid down, we believe the residual business is likely to be saddled with excessive debt.

“The transactions are subject to approval from lenders, shareholders and the Indian telecom regulator. The standstill provides Rcom with seven months to complete the transactions.”

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