Reliance Communications Bonds Fall to Record on Missed Payment

- Interest payment of about $9.75 million was due Monday

- Mobile operator is in a debt standstill until December 2018

Bonds sold by Reliance Communications Ltd., the Indian mobile phone operator controlled by billionaire Anil Ambani, plunged to a record low after the company missed an interest payment.

That marked the firm’s first failure to pay a coupon on a note in the U.S. currency, as it battles for survival amid a shakeout in the world’s second-largest telecom market. With India’s larger mobile players vying for market share, intensifying price competition has driven down earnings at Reliance Communications and other smaller carriers. Amid a wave of industry consolidation, the company’s plan to merge with rival Aircel Ltd collapsed.

Reliance Communications’ earnings slumped after deep-pocketed Reliance Jio Infocomm Ltd., backed by India’s richest man and Ambani’s older brother, started offering free calls last year. Years of over-spending are catching up with the company, which is struggling under a mountain of debt, and some bond investors had been anticipating the latest difficulties.

“Reliance Communications’ high leverage and sector specific challenges have been well known to investors for a long time," said Dhiraj Bajaj, Singapore-based portfolio manager at Lombard Odier.

The price of the $300 million of 6.5 percent securities on which the carrier owed the interest payment slid 1.7 cents, to a record low of 39.4 cents, according to prices compiled by Bloomberg.

Reliance Communications had net debt of 443.45 billion rupees, compared with cash and equivalents of 4.55 billion rupees as of March 31, according to its annual report.

The interest payment of about $9.75 million for Reliance Communications’ notes maturing November 2020 was due on Monday, according to data compiled by Bloomberg. If the company fails to pay interest within seven days of the due date, an event of default would occur, according to a bond prospectus. The company is in a so-called standstill period with its lenders until December 2018.

“For the time being, no payment of interest and/or principal is being made to any lenders and/or bondholders,” the company wrote in a statement.

Reliance Communications, whose customer base of about 75 million people is dwarfed by Idea Cellular Ltd. and Bharti Airtel Ltd., announced plans last week to sell down assets and proposed converting 70 billion rupees ($1.1 billion) of debt into equity. The embattled mobile operator has said it will cut back on its second-and third-generation wireless networks from Nov. 30 and also faces an insolvency petition.

The recovery value for offshore bondholders may not be too high, according to Nomura Holdings Inc.

Recovery Prospects

If the banks go ahead with Reliance Communications’ proposal and take a 51 percent stake in the company through the debt swap, and if bondholders are treated below other secured debt, then their recovery will be nil, said Pavitra Sudhindran, credit analyst at Nomura.  “If bondholders are treated pari passu with other secured debt, our base case recovery is 35 cents,” she said.

There was no immediate reply to emailed questions to Reliance Communications.

Although India’s new bankruptcy laws have taken effect, analysts are skeptical as to how quickly investors can get their money back when payments are missed.

The legal recovery process in India can be “very arduous and slow,” according to Charles Macgregor, head of emerging markets at Lucror Analytics Pte. in Singapore. Investors should be aware of this aspect of lending to Indian companies, he added.

November 7, 2017, 15:57:00 GMT
By Denise Wee, with assistance by Anurag Joshi