As Net Debt Piles Up To $7 Billion, Reliance Communication Faces Key Test

As net debt piles up to $7 bn, Reliance Communication faces key test


MUMBAI: The clock is ticking and costs are seen rising for Reliance Communications Ltd as it struggles to reduce a $7 billion mountain of debt ahead of a major bond redemption next year.

Shares in India's No. 2 mobile carrier, controlled by Anil Ambani , who ranked 36th on last year's Forbes global rich list, dropped to a record low this week leaving the company valued at $4.3 billion.

Six straight quarters of falling profits as a tough telecoms market squeezes margins and failed attempts to raise cash are eroding investor confidence in the company, which faces tests with $1.2 billion in convertible debt falling due.

"The competitive landscape for telecoms firms in India is very tough and that's a problem for Reliance as well," said Lars Hemmingsen, a Copenhagen-based portfolio manager at Nordea Intia, which manages $260 million worth of Indian shares.

"What makes the matter worse for them is huge debt on the balance sheet and weak cash flow. You also have these negative news headlines hitting investor confidence in the firm," said Hemmingsen, who does not hold Reliance Communications shares.

In February, Ambani became the highest-profile executive to be questioned by federal police investigating a telecoms fraud that state auditors say cost the government $39 billion in lost revenues.

No executives from Reliance Communications have been charged and the company has denied any wrongdoing.

Last year, Reliance Communications attempted to sell a 26 percent stake in itself to pare debt. But it found no takers.

A plan to float its tower unit in an initial public offering also failed to take off and a deal to merge its tower arm with a rival collapsed.

Reliance Communications is battling a fast-growing but ferociously competitive Indian cellular market in which call charges have fallen and operational costs have risen, triggering declines in margins, while regulatory worries have also increased.

The shares have fallen about 35 percent this year, making them the eighth worst performer globally among large capitalised firms.

On Feb 9 alone, shares in six companies of Reliance ADA, Ambani's conglomerate, dropped suddenly to wipe $2.5 billion off its market value. The billionaire blamed "baseless and motivated rumours" for the drop.

DEBT TEST

The cost of insuring against debt default in Reliance Communications through credit default swaps (CDS) has risen 90 basis points this year to 525 basis points.

That's an insurance premium of $525,000 for every $10 million of debt and has risen as markets focused on about $1.2 billion of convertible bonds in Reliance Communications that will mature by March 2012.

"If you look globally, the appetite for new issues is pretty low and this company has so many problems. I think the terms of refinancing would be stiff because the company's cash flow continues to be very weak," said Thorsten Vetter, a portfolio manager at Flossbach & Von Storch in Cologne, Germany, who last year sold Reliance Communications bonds maturing in 2012.

Two convertible bonds are due over the next 12 months but investors are unlikely to convert their holdings into equity following the fall in the share price to 93 rupees.

A $297 million bond due in May has a conversion price of Rs 475. A $925 million bond maturing in March 2012 has a conversion price of Rs 654.

Since the bonds are out of the money at current prices, the firm is likely to have to shell out about $374 million for the 2011 bond and $1.2 billion for the 2012 debt.

The 2011 convertible bonds are bid at 122-123 in secondary markets versus the redemption price of 125.84, while investors are more cautious about the 2012s, which are bid at 114.25-114.75 versus their 127.69 redemption price.

A Reliance Communications spokesman declined to comment on the company's plan to reduce its debt burden.

During an analysts call in February, Satish Seth, group managing director of Reliance ADA Group, said the company was evaluating several options.

WEAKENING CASH FLOWS, HIGH DEBT

Reliance Communication's net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) is seen at 4.8 times in the year ending March 31, Thomson Reuters data show.

This compares to just under 3 times at bigger rival Bharti Airtel and 2.8 times at Idea Cellular .

"It doesn't make sense to lend to this company any more. It needs a serious equity injection," said a senior Singapore-based loans banker who covers Indian deals, who was not authorised to speak to the media on the record.

An equity issue, however, would be painfully dilutive, given that Reliance Communications shares have tumbled nearly 90 percent from their 2008 peak .

JPMorgan recently slashed the company's share price target for December by 49 percent to 82 rupees, citing concern about high leverage and the cost of a possible refinancing of $1.2 billion of bonds maturing by March 2012.

"First they will have to set their house in order before they start looking for strategic investors," Hemmingsen of Nordea Intia said. "There is always a buyer for a right price and transactions do happen despite a lot of headwinds."

Despite the troubles, some banks are not shying away from lending to the company, Reliance Communications signed a deal with China Development Bank in December for a $1.93 billion 10-year, syndicated loan.

Courtesy: ET

In Medical Terms, Reliance Communications is on Ventillator Support For Breathing !!!!
Then Again it can be termed as in Persistent Vegitative State ... http://en.wikipedia....egetative_state
Aasani Se Marega bhi nahi aur kisiko chain se jeene bhi nahi dega... Kind of an Emotional Atyachar For Everyone... Investors... Customers.... Creditors...
The Only happy guys are those ex. airtel staff earning a bounty of Crores in Salaries and enjoying their loooong well paid vacation...

Well RCOM having financial trouble is not good for the market, it in a way strengthens the GSM cartel and bad for CDMA. The company by all accounts seems poorly run, might be MDA can step in and take over, but with this much debt it will be tough unless some restructuring is done.

clear case of wrong business decisions and greed on the part of promoters (i dont blame them).. there was no need to go for GSM when they were having excellent CDMA coverage. also they failed to get good handsets... remember a period, when new classic handsets and limited samsung/lg were available. this has resulted a bomb and mass exodus after MNP...

have to pay high for 3G which i feel will not be money spinner for any telco.

i feel that most are with them because of low tariff..

Edited by csmart, 04 March 2011 - 06:43 PM.

Reliance definitely needs re-structuring, as currently they are in big soup... If these things continue soon merger would take place.....They need to improve on following factors in a rapid phase to come out of these mess :

All old customer care executives should be thrown out as they don't even know how to talk with customers & new team should be setup with motive of decent customer service.
cheating with customers should be stopped immediately.
new schemes / tariffs should be announced, which should not be changed every now & then.
they are capable of providing even cheaper tariffs then all, as they have good network in CDMA & PAN India presence. Take Advantage of that.
they have a very strong network in CDMA, should try to concentrate on that & should not avoid CDMA customers.
slowly improving GSM network as well.

WAKE UP RELIANCE......

Well RCOM having financial trouble is not good for the market, it in a way strengthens the GSM cartel and bad for CDMA. The company by all accounts seems poorly run, might be MDA can step in and take over, but with this much debt it will be tough unless some restructuring is done.

CDMA is dying it very painful But Reliance opted for suicidal path after junior Ambani takeover , All Chinese set with
open cheating in Balance, locking sets ,lacking Dual mode sets ,all are reasons . TATA may die because of no network Let us
see who will fallfirst it is very painful Later on MBA student will do the case study

Edited by rajeshkatiyar, 04 March 2011 - 08:29 PM.

see who will fallfirst it is very painful Later on MBA student will do the case study

Postmortem I'd say...

If someone is looking for an example on how a BAD management can kill a thriving business, then look no further. Not only RCOM but all ADAG group companies, without any exception, are living examples of bad performance in the markets. Even in the raging bull markets of last 2 years, investors in ADAG group companies have lost big money. I am glad that I sold my RCOM shares at over Rs 700 several years ago and they were quoting at approx 90 bucks today.

High cost of RCDMA handsets compared with smilar GSM handsets is the main reason why CDMA is a dying business now. Also they built what is without doubt the worst GSM network in the country. GSM is a over 15 years old technology and is no longer a rocket science. There is no excuse whatsoever of building such a crap GSM network where voice clarity is not there, all calls are disconnected within 1 minute even at places where there is full signal and SMS that is never delivered.

From the begining CDMA in India was touted as a poor man's technology. The onus was on making available cheap handsets with even mean call charges, they turned a cold shoulder and shrugged off to market the advanced data poweress.
In my opinion, they went wrong there.

Too early to comment but this Guy will not die for sure. Its from Reliance they kill everybody, they are like phoenix bird

I too agree with Hetal Bhai.

From the begining CDMA in India was touted as a poor man's technology. The onus was on making available cheap handsets with even mean call charges, they turned a cold shoulder and shrugged off to market the advanced data poweress.
In my opinion, they went wrong there.

IMO, at that time, that was probably the way to go to get a large footprint in the market, and fast. Remember, RIM (as it was called that time) grew so fast mainly due to the 501 Monsoon offer. Also don't forget who was at the helm that time. Things clearly started going awry after ADA took over... and it was quite discernable in many ways. Thats when I jumped the boat too...

Edited by raccoon, 08 March 2011 - 12:22 AM.

Even if reliance rises like a phoenix at any point of time in the future, I would say their past was very foolish. At one point of time, they could have been the undisputed leaders, but they let go off their advantage. That happened mainly due to the changing hands of reliance infocomm to ADAG from Mukesh Ambani. I still remember, in 2003-04 whenn all the exisiting operators like Airtel, Hutch (now Vodafone) were offering local call rates of Re. 1 per minute without any tariff cutters, RCDMA was offering a tariff of 1.49(not too sure) without any tariff cutters. And only with a Jaadu recharge of Rs. 49 could the rate have been reduced to 49ps/min. This did not go down too well the subscribers because of the initial expenses.

Also Anil AMbani was obsessed with starting GSM all through out. In the end I feel that RCDMA did not get the publicity and support it much required. Reliance did not market the advantages of the CDMA technology anticipating that they would be getting GSM spectrum and they would be shifting to that tchnology finally. I am sure if RCDMA had adopted better marketing techniques right from the beginning focussing on their brainchild (CDMA) rather than focussing on the adopted child(GSM) it would have been a diffeent picture now.

But now seeing the kind of trouble they are in, I really doubt whether they would be able to rise like a phoneix as anticipated by many, at least in the near future. Their balance sheets are so crappy that no body is interested to purchase even a small stake even at the current valuations. The only thing that can save them is some collaboration with Reliance Infotel Broadband, but again not too sure whether it would be a very wise decision for Mukesh Ambani because he would be buying into litigation rather than assets. Only time will tell regarding the success/failure of RCOM. SO let us wait and see and hope for the best!!!!!!!!!!!!!

Edited by vvinayakpai, 08 March 2011 - 07:53 AM.

[quote name='vvinayakpai' timestamp='1299550946' post='223645']
Let me explain myself Reliance CDMA isdyinb because of KARMA Reliancs GSM is dead alredy TATA is dying
because Reliance has decided to Die But remain Optimistic MTS is alive and it willprove

i knew it was over valued at rs. 500
so i only entered at rs 250 and kept buying till my avg cost is now rs 155
my broker keeps advising me to sell all rcom at a loss and take TCS & tata steel instead
any others stuck with 'trying to catch a falling knife'?

If someone is looking for an example on how a BAD management can kill a thriving business, then look no further. Not only RCOM but all ADAG group companies, without any exception, are living examples of bad performance in the markets. Even in the raging bull markets of last 2 years, investors in ADAG group companies have lost big money. I am glad that I sold my RCOM shares at over Rs 700 several years ago and they were quoting at approx 90 bucks today.

High cost of RCDMA handsets compared with smilar GSM handsets is the main reason why CDMA is a dying business now. Also they built what is without doubt the worst GSM network in the country. GSM is a over 15 years old technology and is no longer a rocket science. There is no excuse whatsoever of building such a crap GSM network where voice clarity is not there, all calls are disconnected within 1 minute even at places where there is full signal and SMS that is never delivered.