MUMBAI | NEW DELHI: The plight of Reliance Communications is more serious than what credit rating agencies believe. The Anil Ambani-owned mobile phone operator has defaulted on its loan servicing obligations with more than 10 local banks, some of whom have categorised the exposure as “special mention account” in their asset books.
SMA assets are loans where the interest payment from a borrower is overdue: if a loan isn’t serviced within 30 days after falling due, it’s marked as SMA 1and if unpaid for 60 days or more, it’s classified as SMA 2. The loan becomes non-performing asset (NPA) – which requires a bank to provide for the loan and take a knock on profitability – if interest is unpaid for 90 days.
Loans to the telco have been redflagged as either SMA1 or SMA2 by at least 10 lenders in India, a bank official told ET.
A few banks will have to treat the account as an NPA after a fortnight, said another banker.
Shares of RCom have fallen 20% in the past two weeks after CARE and ICRA downgraded ratings of the telecom operator’s bonds due to the pressure the telco faces in Indian telecom market and its debt obligation. Rating agencies, however, do not have access to the information on SMA loans which banks share among themselves and the Reserve Bank of India. CARE in its report said the downgrade was the result of Mukesh Ambani-owned Reliance Jio‘s impact on operational risk profile of RCom. Knowledge of an actual default could prompt any agency to take a sterner view of the rating.
Responding to ET’s query about RCom defaulting on loan servicing with several banks, a company spokesperson said: “Post signing of binding documents for the Aircel and Brookfield transactions, RCom has formally advised all its lenders that it will be making repayment of an aggregate amount of Rs 25,000 crore from the proceeds of these two transactions, on or before Sept 30, 2017. The said amount will cover not only all scheduled repayments, but also include substantial pre-payments to all lenders on a pro-rata basis.” He also said that “RCom is presently engaged in discussions with its lenders to obtain their requisite consents for the two transactions and to refinance scheduled instalments falling due in the interim period up to Sept 30, to facilitate expeditious closing of both transactions in the best interests of all stakeholders.”
“Based on the large number of approvals already received for the two transactions and continuing good progress for the balance, RCom expects to meet its all debt repayment obligations in line with these plans, and substantially reduce its overall debt,” the official added.
The company suffered a loss of Rs 966 crore in the January-March quarter – its second straight quarterly net loss leading to its first full fiscal net loss. The telco had a debt of around Rs 42,000 crore as on March 31, which it intends to reduce through its deals with Aircel and Brookfield, to whom RCom is selling 51% stake in its tower unit Reliance Infratel for Rs 11,000 crore. Besides intense competition, RCom’s fourth quarter earnings were hurt by a rise in finance costs.
ICRA, which downgraded RCom Group from ‘BBB’ to ‘BB’, fears competition from Jio could impact profitability and revenue generating capacity of the telecom firm. RCom Group here includes RCom’s units Reliance Telecom and Reliance Infratel.
Announcing its quarterly performance, RCom on Saturday blamed the hyper-competition in the industry post Jio’s entry, the new entrant’s free offers and disruptive pricing for its net loss — compared with a net profit of Rs 90 crore a year back.
“For the first time in over 20 years, the telecom sector registered de-growth in revenues, leading to a reduction in the government’s share in revenues, sharp drop in operating margins, accompanied by increased interest costs arising from a staggering industry debt burden, and higher depreciation and amortisation charges as a result of higher spectrum purchase costs,” said the company in its earnings statement.
ET reported on May 26 that India’s top bankers have warned the government that failure in the debt-bruised telecom sector could result in defaults in the industry whose total borrowings amount to Rs 8 lakh crore.