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Rating agency Moody's downgrades Reliance Communications' credit rating to B2

Global rating agency Moody’s has downgraded credit rating of telecom operator Reliance Communications within high credit risk scale from B1 to B2 with negative outlook on account high debt to cash flow ratio of the company. “The downgrade primarily reflects our expectation that RCom’s leverage — as measured by consolidated debt…divided by EBITDA — will remain above 7 times over the next 6-9 months. Meanwhile the company pursues regulatory, shareholder and debt holder approvals for its announced restructuring, including the de-merger of its wireless business and sale of its tower assets,” Moody’s VP and Senior Credit Officer Annalisa Di Chiara said in a statement.

Negative outlook primarily reflects uncertainty regarding the timing and completion of announced restructuring and the resultant range of leverage and business risk profiles if one or both transactions are delayed or cancelled, Moody’s said. Obligations rated B are considered speculative and are subject to high credit risk. The number in front of these ratings indicate level of risk in the same scale with 1 indicating lower risk and 3 lower ranking within same scale. Moody’s had downgraded RCom from Ba to B1 in November on account of “weak performance” of the company.

Obligations rated Ba are judged to be speculative and are subject to substantial credit risk. Moody’s said that it expects EBITDA (indicator of cash flow) from the company’s Indian operations – which contribute around 85% of EBITDA — will remain under pressure over the next 6-12 months in light of intensifying competition in India’s mobile sector. “The company reported EBITDA of around $1 billion for the 12 months to September 2016, while adjusted debt (includes Moody’s adjustments for spectrum related liabilities) stood at approximately $7.5 billion with limited scope for deleveraging absent successful execution around asset sales and divestments,” the statement said.

The tariff war triggered by new telecom operator Reliance Jio Infocomm with its free 4G services has led to drastic fall in margins of telecom operators. The net profit of telecom major Bharti Airtel in the three months period December 31 reduced to half due to the cut-throat competition. “RCom continues to pursue sale of its telecommunications tower assets and the de-merger of its core wireless operations – which it will merge with Aircel Limited in a new joint venture — although these transactions are expected to take another 6-9 months to close,” Moody’s said.

It said that RCom’s liquidity position remains weak and added that further downward pressure on ratings is possible if the company fails to stem the erosion in leverage over the next 6-9 months. Moreover, with respect to the company’s liquidity position, any failure to refinance at least three months prior to maturity dates could pressure the ratings, it added. “Given the negative outlook, an upgrade is unlikely in near term. However, outlook could stabilise if RCOM’s consolidated debt/EBITDA falls below 6 times on a sustained basis over the next 6-9 months,” Moody’s said.