Sunday, January 29, 2012

>RELIANCE COMMUNICATIONS: FCCB refinancing removes near-term concerns

FCCB refinancing should alleviate near-term liquidity concerns, but longer-term questions remain?

■ RCOM today announced that it has tied up with a group of banks to refinance its FCCBs of US$1.18bn. We believe this move should alleviate near-term liquidity concerns – given its stretched balance sheet with net-debt to EBITDA of 4.9x (as of 2Q12), there was little comfort that FCCB redemption could be met with internal cash accruals. This should also see some positive momentum in the stock, although we believe longer-term balance sheet concerns remain.

 RCOM has secured this loan from a group of banks including Industrial and Commercial Bank of China Ltd (ICBC), China Development Bank Corporation (CDB) and Export Import Bank of China (EXIM) and others. The refinanced loan has a maturity of 7 years and not much colour on the principal repayment schedule is available at the moment. In FY11, RCOM had an underlying net interest expense (not including forex gains or losses) of INR10bn, implying an interest rate of around 4%, we estimate (adjusting for 3G
loans for which interest was capitalised). The FCCBs are now being refinanced at 5%.

 Operationally, some turnaround/stability in the wireless segment has been evident in the last couple of quarters – it has held wireless pricing steady, there is recovery in revenue growth, and revenue share appears to be stable vs declining previously. However, this hasn’t been significant enough to translate into a share price driver.

 Notwithstanding this refinancing deal, RCOM’s stretched balance sheet will be a longer-term concern. It could also curtail investment needed for the business. The company has been vocal about divesting a stake in one of its businesses, to de-lever its balance sheet. However, with little success so far. (Source: Blackstone, “Carlyle set to buy Anil Ambani's RCOM towers”, The Economic Times, 11 November). In the absence of a material operational turnaround, any finalisation of a cash-injection deal could be a significant re-rating catalyst for the stock, we believe. Maintain Neutral

To read the full report: RELIANCE COMMUNICATIONS