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TMCNet:  Debt-laden RCom's funding hopes tied to Chinese banks

[July 30, 2012]

Debt-laden RCom's funding hopes tied to Chinese banks

Jul 30, 2012 (Mint - McClatchy-Tribune Information Services via COMTEX) -- The Reliance Group may have had trouble getting investors to bankroll its telecom public offers, but it has found an unlikely and ever-willing white knight in several Chinese banks which have lent over $5 billion to its group firms in the last three years.

In January, Reliance Communications Ltd (RCom) secured loans from Chinese banks to refinance $1.18 billion of its foreign currency convertible bonds and a fortnight ago, the conglomerate tied up $1.1 billion in loans, again from Chinese banks for Reliance Power Ltd's (R-Power's) Sasan power project.

RCom's refinancing happened after the group had tried for around four years to raise money by listing its tower assets and finding strategic investors.

Its recent attempt to list its undersea cable businesses, Flag Telecom in Singapore didn't fly either.

A senior group executive who did not wish to be identified said Reliance Group had raised around $5 billion from Chinese banks which "have told us they are happy to provide some more." Chinese banks, flush with money and eager to diversify, are helping plug the funding gaps created by European and American banks, he added.

Industrial and Commercial Bank of China Ltd, China Development Bank Corporation and Export Import Bank of China among others that agreed to refinance RCom's bonds with seven-year loans at 5%.

Bank of China, China Development Bank and The Export Import Bank of China bankrolled R-Power's Sasan project.

The bullishness of the Chinese banks in bankrolling the conglomerate is not shared by other investors, who have been giving a cold shoulder to equity offerings from RCom since 2008. The company blames external market conditions and regulatory issues as the key spoilers.

In an announcement on 20 July, RCom said it would "await supportive market conditions and easing of prevailing global uncertainties to proceed" with its $1 billion listing of Flag.

A public issue of the shares would have helped reduce RCom's elevated debt levels. According to a 11 July note by Emkay Global Financial Services Ltd, RCom had a debt of '37,000 crore at end-March.

It was the second public issue RCom had to scrap, after it dropped a proposed listing of Reliance Infratel Ltd in August 2008.

Between then and now, several rounds of talks with strategic investors, including American Tower Corp., have been conducted for a stake sale in the tower firm. In February, private equity firms Carlyle Group LP and Blackstone Group LP began discussing a possible investment but nothing has come off the talks so far.

Carlyle's managing director in India Devinjit Singh did not respond to an email and a Blackstone spokesperson declined comment.

While Reliance claims uncertainty in both global macroeconomic conditions and domestic regulatory environment has plagued the entire telecom sector, experts counter that RCom has found it harder than its peers.

Investors have beaten down the stock.

RCom has lost 93.6% from its intra-day all-time high of '844 in January 2008 on the BSE, while the benchmark Sensex has lost 19.55% in the same period.

Since its Flag Telecom announcement on 20 July, the company has lost 15.22% outstripping the 1.87% decline in the Sensex.

So what's ailing RCom--a testy macroeconomic situation or investor wariness A sector analyst with a domestic brokerage said it was "a mix of both".

"Different reasons at different points of time were applicable. Infratel was betting big on external tenants but when new telecom entrants began to leave, the attractiveness of tower assets plunged. In 2008, after the Reliance Power IPO (initial public offering), investors did not have that kind of an appetite to take on another IPO," he explained, referring to Reliance Infratel's proposed listing.

Another Mumbai-based analyst said investors tend to remember the stock on which they lost money--referring to R-Power's IPO that raised '11,000 crore in early 2008 --more than the ones they make money on. That along with corporate governance concerns raised around RCom's accounting may have done some damage to the company, he explained.

Both the analysts declined to be identified.

The mobile phone service provider has come under criticism for its corporate governance practices, most recently by Canadian research firm Veritas that picked on its "whimsical accounting" and "sub-optimal risk management"--charges the company denied.

Other experts are more lenient on the company.

"The IPO market has been quite nervous and investors have lost money on several public issues. Due to the spillover effect, investors are shying away from new public issues," said Jagannadham Thunuguntla, head of research at SMC Global Securities Ltd.

Another analyst also with a domestic brokerage, requesting anonymity, said as much as 80% of RCom's woes were due to issues outside its control. "In bad times, every negative factor gets scrutinized. You need a very strong balance sheet and cashflows to impress the markets right now and this one (Flag Telecom) may be didn't have that," he said.

The group executive quoted above said macroeconomic conditions had scuttled the listing plans of many firms in Singapore as well, and that regulatory uncertainty was casting a shadow on the entire telecom sector in India and all of RCom's peers too were seeped in debt. The sector has a debt of at least '225,711 crore on its books aggregating across loans of Bharti Airtel Ltd, Vodafone, Idea Cellular Ltd, RCom and tower firms Viom Networks and Indus Towers Ltd.

"It is business as usual for RCom. Yes, there is leverage (debt) that we would like to reduce but there is no urgency. Most of the capex (capital expenditure) is behind us and we have no major payouts listed," he said.

To be sure, the telecom sector has been beleaguered in recent times.

The 2G scandal tainted some companies and a subsequent verdict by the Supreme Court in February stripped service providers of 122 licences. Now, with a costlier re-auction of spectrum lined up, tower firms' business models across the board took the knock as some recent entrants decided to exit India.

The policy rap triggered the exit of United Arab Emirates-based Etisalat Group from its Indian joint venture Etisalat DB Telecom India Pvt. Ltd--Reliance Infratel's biggest customer after its anchor client and parent RCom--as well as smaller player STel Pvt. Ltd, affecting its valuations.

"The telecom sector itself is not in the best of times. Then concerns have been cast on the entire industry regarding the new amount that the industry has to pay for spectrum charges and the possible debt burden," said Thunuguntla.

As for RCom, he said it should "unlock value in their tower business and they may have to sacrifice the kind of valuations that were around in 2007. They may have to step back from that" expectation.

R-Power has sued HT Media Ltd, publisher of Mint, in the Bombay high court over a 12 May 2010 front-page story in Mint that it disputed. HT Media is contesting the case.

___ (c)2012 the Mint (New Delhi) Visit the Mint (New Delhi) at www.livemint.com Distributed by MCT Information Services

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