At the same time, the ratings remain under review for further downgrade.
"The downgrade to B1 from Ba3 reflects RCOM's weak operating performance in 1H FY2017, as evidenced by the continued contraction in profitability through 2Q 2017 - primarily at its Indian operations, the largest contributor - and the resultant rise in leverage, as measured by adjusted debt (including deferred spectrum liabilities)/EBITDA, which now exceeds 7.0x," says Annalisa Di Chiara, a Moody's Vice President and Senior Credit Officer.
The ratings remain under review for further downgrade, given the two material transactions that the company has announced will likely result in a structural reorganization across the group and a recalibration of the credit risk for bondholders.
The first transaction, announced in September, refers to the de-merger of RCOM's wireless business and its combination with Aircel Limited (unrated), the wireless business of Maxis Communications Berhad (MCB, unrated), into a new a new joint venture equally owned by RCOM and MCB. RCOM says its debt levels would fall by Rs 200 billion ($ 3 billion) as it transfers bank debt and spectrum liabilities to MergerCo.
The second transaction, announced in October, refers to a non-binding agreement for the sale of 100% its tower assets and related infrastructure to Brookfield Infrastructure Group (unrated) for Rs 110 billion ($ 1.6 billion). The specified assets will be transferred from RCOM's subsidiary, Reliance Infratel (unrated), into a separate SPV (TowerCo) to be owned by Brookfield. We understand from RCOM that a definitive agreement will be signed by mid-December.
While the expected reduction in debt achieved from these two transactions will be credit positive, it will take 6-9 months for both transactions to close. Moreover, this is a material shift with respect to business focus, scale and growth strategy key factors that affect the credit profile of the company and credit risk for bondholders.
Post restructuring, RCOM will transform from India's 4th largest wireless telecommunications operator into a company focused on the B2B segment and providing retail and wholesale data connectivity, as well as internet networks and services. It will also lease its submarine cable infrastructure owned and operated by its 100% owned subsidiary, GCX Limited (B2 stable) - and metropolitan city networks.
"With the planned de-merger and tower sale, some of the 'non-core' assets originally identified for disposal like GCX - when we had initially assigned the rating - will become RCOM's key business focus," adds DiChiara.
"And, while the remaining businesses may exhibit annuity-like revenues streams, the company's scale will be much smaller in terms of revenues and EBITDA. Furthermore, it will remain relatively highly levered with USD 2.8-3 billion of debt based on Moody's estimates on a pro-forma basis after the expected reduction in debt from the de-merger and tower sales," says Di Chiara.
At the same time, RCOM will retain a 50% interest in the wireless MergerCo. We also understand RCOM will benefit from a 49% economic upside interest in the TowerCo subject to certain performance conditions.
However, we do not believe that RCOM's cash flows will benefit from dividends from either MergerCo or TowerCo for at least the first 12-24 months of operation, although we expect these investments could be monetized over the longer term.
Moody's review will focus on (1) timely progress in RCOM's announced transactions, including regulatory approvals and processes related to lender and bondholder consents, as required, for the de-merger of the wireless business and the tower asset sales; (2) assessing the credit quality and financial strength of the remaining businesses, particularly as related to the company's enterprise and fiber optic business; and (3) assessing the effects of the proposed restructuring on the collateral package for RCOM's USD bond holders.
Moody's will also evaluate the residual RCOM's business strategy going forward.
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