Another big fat Indian deleveraging

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India’s ‘House of Debt’ is still swaying, though a little less dangerously than before. For the country’s highly leveraged companies, the year is closing on a somewhat more cheerful note than seemed possible six months ago.
First, it was the billionaire Ruia brothers delivering the good news to Standard Chartered Plc and other creditors. As much as $5 billion of the $13 billion Essar Global Ltd. got from selling India’s second-largest private-sector refinery to Russia’s Rosneft PJSC and a consortium of Trafigura and United Capital Partners went to retire debt.
That was in October. Now, it’s the turn of Anil Ambani, the younger brother of India’s richest tycoon, Mukesh Ambani, to sell assets and shed obligations. Reliance Communications Ltd. jumped as much as 9.8 percent on Wednesday after it signed a definitive agreement for its cellular towers. The sale to Brookfield Infrastructure Group, plus a separate plan to combine RCom’s mobile business with smaller operator Aircel Ltd., will prune leverage by $4.6 billion, or almost 70 percent of the total.The remaining 30 percent could be still troublesome. By selling core assets, RCom will, after all, also lose the bulk of its repayment ability. Out of $3 billion of annual revenue, as much as $2.1 billion comes from the wireless business and towers, according to Moody’s Investors Service. Strip that out, and it will be a struggle to garner $400 million to $500 million of earnings before interest, taxes, depreciation and amortization. That profit is needed for RCom to steady debt at 6 to 8 times Ebitda, in line with other B-rated companies, Moody’s says.Some of the assets being sold are collateral for RCom’s $300 million 2020 dollar bonds. While noteholders haven’t exactly been ecstatic about the deleveraging, they don’t seem to be too perturbed, either. The leftover part of RCom will control the world’s largest privately owned undersea cable system, together with a domestic optic fiber network.
Additionally, it will be a holding company for a 50 percent interest in the mobile joint venture with Aircel; RCom will also get a 49 percent “future economic upside” in the towers being sold to Brookfield. Both assets, the company says, would be “monetized at an appropriate time” to further reduce debt.
Financials, though, are only one part of the story. RCom’s biggest advantage in India’s brutally competitive wireless scene is its complete alignment with Reliance Jio, the elder Ambani’s newly launched fourth-generation mobile service, whose cutthroat pricing is threatening to upend the industry.
While that hasn’t prevented a near-60 percent rout in RCom’s shares this year, investors’ calculations could change by mid-2017. By then, the merged RCom-Aircel business, into which Russian tycoon Vladimir Evtushenkov has already folded his carrier Sistema Shyam Teleservices Ltd., should be ready with a 10-percent-plus share of India’s wireless market. If the older Ambani’s Jio decides to expand quickly by buying out RCom’s stake in this company, then RCom would have a significantly lower debt burden supporting a boring —but stable —communications infrastructure business requiring very little fresh capital. That’s when the deleveraging would pay off.
The median large Indian company is still not out of the woods. Ebitda that covered 9.4 years of interest in 2012, is only sufficient for about 8.5 years’ worth of payments to creditors now. Debt-to-equity is down to 56 percent, from 64 percent four years ago. That’s still high, but at least deleveraging is moving the needle in the right direction. Facing a similar squeeze on profitability, the median publicly traded company in China, Hong Kong, Singapore and Malaysia is still piling up debt.
What could go wrong for India? The biggest risk is that the government’s sudden ban on 86 percent of the cash that circulated in the economy on Nov. 8 leads to such a big drop in India Inc.’s earnings that their debt-servicing capacity shrinks even as potential buyers of assets run away. The big fat Indian wedding is already facing a cash crunch; there’ll be trouble if deleveraging goes the same way in 2017.


Andy Mukherjee is a Bloomberg View columnist.
He is the author of “Junkyard Planet: Travels in the
Billion-Dollar Trash Trade”

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