Early last week, Reliance Communications Ltd (RCom) presented a so-called “zero loan write-off plan” to its lenders. When it announced the plan, the company gave the impression that secured creditors will come out all smiles. Punit Garg, executive director at RCom, told Mint, “Do you think lenders can refuse a zero write-off plan? They got to be so happy and thrilled.”
The reality is quite different.
The price of RCom’s $300 million 6.5% note due 2020 fell to a record low of 39.4 cents on the dollar this week, according to Bloomberg. In other words, bondholders, who are secured creditors, are pricing in a 60% haircut on what the company owes them. True, they aren’t exactly a proxy for all secured creditors, but their trading behaviour does provide strong clues on the extent of write-off lenders expect. The bonds fell after the company missed an interest payment on the 2020 bond.
With bondholders pricing in a 60% write-off on their investment, it’s safe to say that the assumptions behind RCom’s zero write-off plan are extremely generous. Under the plan, the company estimates that a little over two-thirds of its Rs40,000 crore secured debt would be retired by selling assets such as towers, fibre and real estate. It also expects secured lenders to exchange loans worth Rs7,000 crore for a 51% stake in the company’s remaining businesses such as data centres and the enterprise business. The new-look RCom would service the remaining debt of around Rs6,000 crore using cash flows of the remaining business. It isn’t clear what would happen to unsecured creditors, who have given loans worth Rs5,000 crore to the company.
Pavitra Sudhindran, a Hong Kong-based credit analyst at Nomura Holdings Inc., says the valuations the company has announced for its assets appear optimistic. Nomura’s base case asset recovery calculations suggest RCom can generate about Rs13,900 crore in all by selling its tower, fibre and real estate assets, covering just 35% of its secured debt. RCom has told lenders it expects Rs27,000 crore from asset sales.
“We assume the tower valuation to be 50% of the Rs11,000 crore valuation agreement signed with Brookfield; the 50% haircut being on account of cancellation of the Aircel merger and closing down of RCom’s 2G/3G wireless business. For the fibre business, we assume an EV/Ebitda multiple of ~3x on estimated FY17 Ebitda of Rs1,120 crore giving us an EV of ~Rs3,400 crore. We think that Rs10,000 crore valuation for the real estate is too optimistic and in our base case asset recovery calculations, we haircut this by 50%,” says Sudhindran. EV is short for enterprise value and Ebitda is earnings before interest, tax, depreciation and amortization.
Besides, while RCom expects to generate funds by selling spectrum, Nomura sees little value in these assets. “Among other reasons, recent spectrum deals in the India telco space makes us less sanguine about spectrum valuations especially for stressed players,” says Sudhindran. When the Tata group decided to hand over its telecom business to Bharti Airtel Ltd last month, it even agreed to retain some of the deferred spectrum liabilities on its own books, let alone expecting anything for its spectrum assets.
RCom also seems too optimistic about its lenders’ willingness to convert debt into equity. Converting loans worth Rs7,000 crore for a 51% stake suggests a conversion price that is at a premium of about 55% to RCom’s current traded price. The company also expects to retain debt worth Rs6,000 crore in the remaining business. It isn’t clear how the remaining business can be ascribed an enterprise value of around Rs20,000 crore, given its relatively small size.
RCom is shutting down its voice business and after selling its tower and fibre assets, it will be left with only data centre and enterprise businesses. The latter’s net revenue and profit will shrink in size after the sale of the fibre assets, and the former is already fairly small in terms of scale, generating a profit of around Rs50 crore annually.
For some reason, though, equity shareholders seem fairly sanguine about the company’s prospects. Even though RCom shares have plunged this year and trade near all-time lows, the company still has a market capitalization of Rs4,355 crore. And if banks agree on the loan conversion proposal, this means equity capital will more than double and RCom will have a market cap of around Rs8,900 crore at current prices.
If bondholders expect secured creditors to get only 40% of what they’re owed, it’s a wonder why equity shareholders should attach such a material value to the company at all. They still seem to be entertaining the hope that Reliance Jio Infocomm Ltd will emerge as a knight in shining armour and relieve RCom of its woes. From the looks of it, Jio may just pick up bits and pieces in the asset sale process, and that too at cut-price valuations, leaving both lenders and shareholders licking their wounds.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay High court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.