Moody's Investors Service says that Reliance Communications (RCOM) B1 corporate family and senior secured ratings remain on review for downgrade despite signing a binding agreement with Brookfield Infrastructure (unrated) in relation to the sale of RCOM's tower assets.
On December 21, 2016, RCOM announced a binding agreement for the sale of 100% of its tower assets and related infrastructure to affiliates of Brookfield Infrastructure Partners LP (unrated) and its institutional partners for INR110 billion (USD1.6 billion), which is in line with Moody's expectations.
The specified assets will be transferred from RCOM's wholly-owned subsidiary, Reliance Infratel (unrated), into a separate new company (TowerCo) that will be 100% owned and independently managed by Brookfield Infrastructure.
At the same time, RCOM will receive class B non-voting shares in TowerCo, providing a 49% economic upside interest in the tower business, based on certain performance conditions being met.
However, no further clarity has been provided with respect to the nature of these conditions.
While the signing of a binding agreement is credit positive, the ratings remain under review for downgrade, because of RCOM's announced transactions -- 1) de-merger of its wireless business; and 2) sale of its telecommunications tower assets, which will likely result in a structural reorganization across the group, and recalibration of the credit risk for bondholders.
Both transactions are subject to approvals-including from shareholders, regulators and bondholders-which are expected to take 6-9 months to complete.
Moreover, there is still a lack of clarity on the cash flow generating capabilities of some of RCOM's remaining businesses-namely the enterprise and fiber optic business segments-because the resulting leverage or cash flow positions following its restructuring can only be estimated within wide bounds.
Moody's review will focus on: (1) timely progress in RCOM's announced transactions, including regulatory approvals and processes related to lender and bondholder consents, as required, for the de-merger of the wireless business and the tower asset sales; (2) assessing the credit quality and financial strength of the remaining businesses, particularly as related to the company's enterprise and fiber optic business; and (3) assessing the effects of the proposed restructuring on the collateral package for RCOM's USD bondholders.
Moody's will also evaluate the residual RCOM's business strategy.
Shares of the company gained Rs 2.4, or 6.85%, to settle at Rs 37.45. The total volume of shares traded was 5,827,231 at the BSE (Wednesday).
