By Nidhi Dhruv, Assistant Vice President, Moody’s Investors Service
Reliance Communications Limited’s (RCOM, Ba3 with a stable ratings outlook) planned sale of its towers and related assets is credit positive because it will significantly improve the company’s financial profile.
Specifically, the proceeds will help substantially lower the company’s adjusted debt over the next 12 to 18 months and, in turn, its debt leverage and near-term refinancing risks, given its publicly stated intention to use the entire amount to lower debt.
The sale of the towers, which are owned by RCOM’s subsidiary, Reliance Infratel Limited (RITL, unrated), to two investment companies -- Tillman Global Holdings, LLC (unrated) and TPG Asia, Inc (unrated) – is expected to bring in $3.4 billion (INR220 billion).
The non-binding agreement with Tillman and TPG has an exclusivity period until 15 January 2016. The proposed transaction is subject to final due diligence and regulatory and other approvals. RCOM expects the tower transaction to close in April-June 2016. In the event of technical or regulatory constraints on the proposed transaction, or delays in announcing the final transaction, there will likely be imminent downward pressure on the rating.
RCOM had around $7.0 billion of adjusted debt as of 30 September 2015, which will decline by $1.5 billion-$2.6 billion to about $4.4 billion-$5.5 billion pro forma with the application of the proceeds. While the operating costs for the towers will decline, its rental costs for leasing them back will increase its consolidated lease expenses, which we capitalize and add to its gross debt. However, given that lease rentals for towers in India are relatively low, RCOM’s adjusted debt should still drop substantially. Consequently, adjusted debt/EBITDA should decline to around 4.0x-4.5x for the fiscal year ending March 2017 (FY2017) and to 3.5x-4.0x in FY2018 from 6.1x as of September 2015
These adjusted numbers incorporate the impact of RCOM’s acquisition of wireless company Sistema Shyam Teleservices (SSTL, unrated), which was announced in November 2015. RCOM has agreed to cover payments for spectrum allotted to SSTL, with scheduled annual payments of INR3.9 billion ($59 million) over the next 10 years. Our projections include these deferred payment liabilities as debt.
However, this expected drop in RCOM’s leverage lags earlier expectations due to delays in the sale of other non-core assets, such as its sub-sea cable subsidiary GCX Limited (B2 stable) and its direct-to-home cable business and property assets in Mumbai and Delhi. The proceeds from the sale of these assets are unlikely to come through over the next two to three quarters.
The tower sale will also alleviate liquidity and refinancing pressure for the next 18 months. As of September 2015, RCOM had INR424 billion of reported debt, of which INR43 billion will mature in FY2016 and INR97 billion in FY2017.
The proceeds will help substantially lower the company’s adjusted debt over the next 12 to 18 months and, in turn, its debt leverage and near-term refinancing risks, given its publicly stated intention to use the entire amount to lower debt
Still, the company will need to obtain approvals from banks and bond-holders to carve out the tower assets from the respective collateral packages, and certain banks loans could be accelerated as a result of this transaction. These factors, however, are unlikely to create real refinancing risk, given RCOM’s track record of receiving semi-annual covenant waivers from banks.
Assuming that RCOM applies all the sale proceeds to reduce its debt, as it has stated, it should also be in a better position to meet its covenants and be able to meet its net debt to EBITDA covenant in FY2017. However, pressure could remain under its EBITDA/interest expense covenant.
Separately, RCOM is also pursuing the sale of RITL’s fibre optics business within the next few months for an estimated INR80 billion-INR100 billion ($1.2 billion-$1.5 billion). If the proceeds are fully applied towards its debt, this would lower RCOM’s adjusted leverage by an additional 50 basis points over the next two years.
While these asset sales are credit positive for RCOM, and allow it to reduce its leverage, any upward movement for its Ba3 rating would require continued improvements in its financial metrics stemming from operating fundamentals, further asset monetization or spectrum trading and sharing strategies.
The company’s operating performance has been in line with our expectations, with EBITDA margins of 33%-34% between Q1 2014 and Q2 2015. Going forward, improved fundamentals could stem in particular from RCOM’s core-Indian operations, if it grows revenue and earnings by expanding the number of subscribers and data revenue without compromising its EBITDA margins
