COIMBATORE: Moody's Investors Service has downgraded Reliance Communications ( RCOM ) corporate family rating and senior secured bond rating to Caa1 from B2. The ratings are under review for further downgrade, it said.

"The downgrade reflects RCOM's weak operating performance, high leverage and fragile liquidity position. The company's reported EBITDA (earnings before interest, taxes, depreciation and amortisation) has fallen 29% year-over-year (y-o-y), evidencing its weak market position and contracting subscriber base," said Annalisa DiChiara, a Moody's vice-president and senior credit officer.

RCOM reported an 11% y-o-y decline in revenues and a 29% y-o-y contraction of EBITDA to Rs 5390 crore ($830 million) 2016-17. EBITDA margin dropped to 27% from 34.2% during the year.

“RCOM's weak operating results reflect the intense state of competition, driven in turn by the free services offered by Reliance Infocomm Limited (RJio) from mid-September 2016 through April 1, 2017,” the agency said.

"RCOM's liquidity position is fragile. RCOM has around Rs 23,000 crore short-term debt and current long term debt maturities through March 31, 2018. In addition, the company disclosed in its financial statements that it is still awaiting formal confirmation from lenders for waivers of certain loan covenants so the loan amount continues to be classified as a non-current liability. We believe failure to obtain could exacerbate near-term liquidity pressures," DiChiara said.

“Historically, the company has relied on short-term debt and covenant waivers from its banking relationships. Should the waivers not be received, this development could have significant implications for the holders of RCOM's $300 million bond, as there are cross-payments and cross-defaults for any acceleration, in each case by the issuer or any restricted subsidiary, with respect to debt in aggregate of $10 million,” Moody’s stated.

“Separately, the company announced that it is current on interest payments as related to its $300 million bond,” it said.

RCOM reported cash and cash equivalents of Rs 1,020 crore as of March 31, 2017. “This will be insufficient to cover upcoming debt maturities, absent waivers from its lenders while the company pursues the completion of its corporate restructuring,” the agency said.

The restructuring includes the sale of its telecommunications tower assets and the de-merger of its core wireless operations which it will merge with Aircel (unrated) in a new joint venture ( MergerCo ). RCOM's consolidated debt levels continued to rise.

The company reported a total debt of Rs 45,700 crore at the end of March, resulting in reported debt/EBITDA of 8.5 times.

“Including its reported Rs 3,320 crore of deferred payment liabilities, leverage increases further to over 9. Given the weak operating outlook and high competitive intensity of the Indian mobile sector, there is no scope for RCOM to deleverage, absent the successful execution of its corporate restructuring,” Moody’s said.

