India-based Reliance Communications’ (RCom) plans to demerge its wireless business into a 50:50 joint venture and sell 51 per cent of its tower business will be negative for its creditors, even if funds from the tower transaction are used to pay down debt.

Fitch Ratings downgraded RCom’s issuer default rating to B+ from BB-.

The ratings agency believes RCom’s plan to sell off its wireless segment along with spectrum and infrastructure assets and merge those with Aircel would cause it to lose about half of its EBITDA without any meaningful improvement in leverage. The demerger will also reduce deferred spectrum liabilities related to the wireless business of INR60 billion ($883 million). The transaction is subject to approvals from holders of the $300 million bonds, competition authorities and Indian courts, which RCom expects to receive by end-March.

RCom’s plan to sell a majority of Reliance Infratel for $1.6 billion and use the proceeds to pay down debt will not reduce financial leverage sufficiently to retain a BB- rating, Fitch predicts. The operator signed a binding pact with Canada’s Brookfield Infrastructure to sell the stake in its tower business.

Fitch estimates RCom’s pro forma net debt and EBITDA would be around $1.5 billion to $1.6 billion and $240 million to $250 million respectively in the fiscal year to end-March 2018 following the transactions (excluding Global Cloud Xchange, its 100 per cent owned subsea cable business) .

Rising business risk
The moves will transform RCom into a B2B company. Its optical-fibre business, which would account for about 53 per cent of pro forma EBITDA, is exposed to annual changes in the sale of its fibre capacity to Reliance Jio, part of Reliance Industries. However, Fitch expects these cash flows to remain stable in the short term given Jio’s large capacity needs due to its data-centric model.

RCom’s enterprise segment, which would contribute between $110 million and $120 million to EBITDA, will benefit from recurring revenue, long-term contracts and lower capex requirements.

The ratings agency acknowledged RCom could raise additional capital to pay down its holding company’s debt through the sale of its pay-TV business, dilution of some of its stake in GCX and selling surplus real estate.