The Story Behind Reliance Communications’ SDR

Why banks decided to invoke Strategic Debt Restructuring at Reliance Communications.

Pedestrians walk past a Reliance Communications Ltd. Mobile Store in Mumbai Photograph: Dhiraj Singh/Bloomberg
Pedestrians walk past a Reliance Communications Ltd. Mobile Store in Mumbai Photograph: Dhiraj Singh/Bloomberg

It’s a double rescue. In deciding to trigger the conversion of Rs 22,000-crore debt to equity in the Anil Ambani-promoted Reliance Communications Ltd., a domestic lending consortium has bought itself and Ambani time.

On Friday, two days after RCom’s debt was downgraded to ‘default’ by credit rating agencies, the consortium met in Mumbai to discuss the future course of action for the company. The meeting was called by State Bank of India, the lender with the maximum exposure to the telecommunications company. After a discussion among themselves, and reviewing a plan submitted by the company, the consortium decided to invoke the strategic debt restructuring (SDR) scheme of the Reserve Bank of India (RBI).

Under the SDR scheme, lenders are allowed to convert debt to majority equity in a company, which they will sell to a deserving buyer to recoup their money. This, in turn, helps in improving the credit profile of the company since the new owner’s rating and its ability to infuse fresh funds will be considered before selecting a buyer.

Significance Of The SDR Move

It is important to note that since the RBI introduced the restructuring scheme in June 2015, SDR has been invoked in a large number of cases, most of them being companies where the debt being restructured is significantly high. But apart from a handful of cases, SDR has been largely unsuccessful in stress resolution. The main reason for failure has been the lack of buyers for these companies and the inability of bankers to arrive at a reasonable valuation for the few buyers who might be interested.

But this will not be a hurdle in the RCom case.

According to at least three people who attended the lenders’ meeting and spoke with BloombergQuint on the condition of anonymity, the consortium’s decision to invoke SDR was quick as RCom has already found buyers for a few of its assets.

In September 2016, RCom and Aircel Ltd. announced the merger of their respective wireless businesses. In March this year, the companies got a nod from the Competition Commission of India (CCI). Further approvals are pending. Similarly in December 2016, the Ambani-led company signed a definitive agreement to sell a 51 percent stake in its telecom towers business to Canada’s Brookfield Group. Here too, all approvals from a few regulatory authorities and overseas lenders are not yet in.

Together, the wireless and telecom tower businesses represent 60-70 percent of the total revenue of RCom. The proceeds from these transactions are expected to reduce the company’s debt by nearly Rs 25,000 crore, or 60 percent of the total Rs 45,000-crore burden.

As such, the RCom account had already reached special mention account (SMA) status, which meant that the repayment of debt to a number of lenders in the consortium had been delayed by 30-60 days . If not checked, this would have eventually led to a non-performing asset (NPA) tag.

Now with SDR being invoked, that classification and all debt servicing comes to a standstill for 210 days. Before the end of which, banks are required to convert the debt to equity.

Buying Time Via SDR?

During this 210 day period – that is till December 2017 – banks can maintain the account as a standard asset and spare themselves additional provisioning and a subsequent hit to their financials. Equally, RCom, that recently delayed a scheduled Rs 347 crore repayment on a non-convertible debenture series, gets a reprieve from interest payments to the banks.

Under the SDR process, after the debt-to-equity conversion, banks have 18 months to recover their money. But, at a press briefing on Friday, Ambani pointed out that the 210-day period was enough to complete the company’s asset sales and reduce debt.

Lenders have given Reliance Communications till December 2017 to complete two deals (Aircel merger & tower deal). We are confident of completing both deals by September. We expect to exit standstill on debt servicing obligations by December-end. 
Anil Ambani, Chairman, Reliance Communications

Banking sector expert Ashvin Parekh commented to BloombergQuint on whether this was the first time that SDR was being used to buy time.

In the present circumstances, this might be the most convenient approach for the lenders as well as the borrower. What is interesting is the part-use of the larger framework of the SDR scheme. 
Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services LLP

The invocation of SDR will also take off the heat generated by the negative news flow arising out of the company’s recent debt downgrades.

Through the week, rating agencies CARE Ratings Ltd. and ICRA Ltd. downgraded Reliance Communications’ debt to default, citing concerns over the company’s weak financials and the NCD repayment delay. Fitch Rating Ltd. warned of a possible default while Moody’s Investor Services downgraded Reliance Communications.

Telecom Sector Worries

The quick decision-making on the lending consortium’s part was also prompted by the mounting stress in India’s telecom sector in general. Heightened competition and declining profitability had begun worrying bankers as well as the RBI.

In a notification on its website on April 18, the banking sector regulator had warned banks against the stress in the telecom sector and had said that bank boards should provide higher against loans to the sector and closely monitor any developments.

A senior SBI official also confirmed that the bank’s chairman, Arundhati Bhattacharya, had written to the Department of Telecom (DoT) recently, requesting the department to clear any pending merger deals quickly to avoid any further stress.

According to a presentation by Punit Garg, chief executive officer of Reliance Communications’ India enterprise business, on Friday, the gross liability of the telecom industry stands at around Rs 7.75 lakh crore. Of this, the Indian debt and commercial debt borrowings were at Rs 2.8 lakh crore, while liabilities of bond holders, vendors financing and creditors stood at Rs 2 lakh crore. The rest refers to deferred spectrum payments to the Government of India.