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Credit rating agencies wary over Reliance Infra’s demerger plan

Credit rating agencies wary over Reliance Infra’s demerger plan
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First Published: Tue, Mar 17 2009. 10 47 PM IST
Updated: Tue, Mar 17 2009. 10 47 PM IST
Mumbai: Credit rating agencies are turning cautious on Reliance Infrastructure Ltd (R-Infra), and its plans for a restructuring has become the latest in a line of worries.
Crisil Ltd, the Indian subsidiary of credit rating firm Standard and Poor’s, on 13 March reaffirmed its highest rating of “AAA” on R-Infra’s Rs1,300 crore bond programme and “P1+” on its short-term debt, but choose to put these on a negative watch, citing the demerger plan.
A negative watch indicates potential for a rating downgrade, which could make it more expensive for the company to borrow money.
India’s third largest utility, part of the Reliance-Anil Dhirubhai Ambani Group (R-Adag), had said in February that it would spin off its divisions into seven wholly owned subsidiaries, which would place the utility at the helm as the holding company.
“If the demerger scheme is implemented in its present, draft form, R-Infra can potentially become a holding company, with all the operating assets held by its subsidiaries,” Crisil said in its report. “Implemented thus, the demerger could result in a downward revision in Crisil’s ratings.”
A Crisil executive, who didn’t want to be named, said the ratings were put under a watch because “it is unclear right now where the debt will reside” after restructuring. The agency is in discussions with the company’s management to understand the structure, timelines and the “proposed allocation of debt” to the subsidiaries, he added.
Lalit Jalan, chief executive of the Anil Ambani-owned company, sought to allay these concerns by saying that the new structure would lead to efficient management of resources and attract investors looking at specific infrastructure segments within R-Infra’s portfolio.
“The businesses are simply being regrouped. R-Infra will continue to have 100% stake in its subsidiaries. There is no new equity or debt being created owing to this demerger,” Jalan said over the phone on Tuesday. “Some assets are already in the SPV (special purpose vehicle), while others that are in R-Infra’s books will go to these 100% subsidiaries. The total debt remains the same.”
“It is a normal practice for rating agencies to place a credit rating on watch, when there is an announcement of a significant transaction, such as an acquisition, demerger, reorganiszation, etc., and the same by itself does not carry any adverse implications,” an R-Adag spokesperson said in an email. “At this stage, details of the proposed demerger scheme have not yet been finalized... the proposed scheme will be finalized...with the objective of maintaining the existing ‘AAA’ rating, and protecting the best interests of all stakeholders... and appropriate disclosures will be made to the rating agencies...enabling them to take a final view.”
The proportion of the debt that will stay with R-Infra and be placed with the new entities is still unclear.
For the fiscal year ended 31 March, R-Infra had a total debt of Rs5,009.04 crore. A bulk of it, Rs3,863.88 crore, is under the category of unsecured loans.
Fitch Ratings had put R-Infra on a similar ratings watch in June, citing the “company’s aggressive plans to expand the business by promoting a number of greenfield ventures” and downgraded its ratings two notches from “AAA” to “AA+” in July and to “AA” in December.
Fitch had said its second downgrade reflected increased uncertainty over whether R-Infra would infuse Rs7,840 crore through share warrants and “implementation risks due to R-Infra’s involvement with its project companies as a construction and executing agency through its EPC (engineering, procurement and construction) division”.
The seven separate subsidiaries planned to emerge from the restructuring will house the Dhanau Thermal Power Station, the Goa and Samalkot power stations, the firm’s EPC division, as well as its transmission, distribution, toll road and real estate businesses—mimicking a structure similar to what Reliance Capital Ltd, another Anil Ambani-controlled company, is modelled on. The plan needs approval from the company’s board and regulatory and judicial clearances.
“The company will place all its assets in the subsidiaries, but the liabilities, or at least some part of it, will stay on in the books of R-Infra. With no assets to back up the loans, the borrowings will only be against the equity R-Infra holds in its subsidiaries. That may be a concern from lenders’ perspective,” said an analyst, who tracks the company for a domestic brokerage firm.
The analyst, who didn’t want to be named, said it was too early to comment on the restructuring as details were still awaited.
Another analyst with a domestic brokerage, who also declined being identified, said R-Infra’s income after the demerger would largely be from dividends of its subsidiaries and it would not have direct access to their cash flow, unlike now—another possible concern.
Ashwin Ramarathinam contributed to this story.
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First Published: Tue, Mar 17 2009. 10 47 PM IST