RCom: where bondholders see glimmer of hope, its investors are more optimistic
Reliance Communications Ltd’s (RCom’s) bonds did not react initially to the debt resolution plan that the company unveiled on 26 December. But on Thursday, the company’s 6.5% bond due 2020, jumped by about 40% and was trading at 55.061 cents to a dollar.
Bond prices rose after RCom said it struck a deal with Reliance Industries Ltd’s unit Reliance Jio Infocomm Ltd to sell its wireless spectrum, tower, fibre and media convergence node assets. The consideration for the transaction has not been disclosed, which makes it difficult to evaluate how much funds will accrue to RCom. The deal is expected to be closed in phases by March 2018.
But the RCom statement says the consideration will primarily be in cash and includes transfer of deferred spectrum instalments payable to the department of telecommunication.
On 26 December, RCom had said monetization of the spectrum, towers, fiber, media convergence nodes and real estate assets in New Delhi, Chennai, Kolkata, Jigni and Tirupati will lead to a debt reduction of around Rs25,000 crore.
The Reliance Jio transaction covers this package, except for the real estate assets. If the Rs25,000 crore figure holds good, then one can assume that the telecom business sale consideration will be within this level.
In addition, the commercial development of Dhirubhai Ambani Knowledge City campus at Navi Mumbai is pending.
The sale of assets to Reliance Jio is positive for RCom as it represents a step forward in the resolution process it had outlined and lends more certainty in terms of its execution. But the sharp rally in RCom’s shares is a call for investors to exercise caution, and perhaps wait for more clarity on the consideration to be announced for the telecom business, and also progress in the residual asset monetization.
A 26 December presentation by RCom showed an indicative enterprise value of the residual company at around Rs15,000 crore. Residual implies what remains after it sells the identified assets. Debt of the residual company is projected at Rs6,000 crore.
Post-asset monetization, including of real estate, the residual company is expected to be left with Rs10,000 crore debt (before the infusion of funds through a stake sale). That leaves equity investors with Rs5,000 crore of value (enterprise value minus Rs10,000 crore-debt) whereas on Thursday, its market capitalization crossed Rs8,560 crore. Investors seem to be running ahead in terms of their expectations.
Of course, the rise in the bond price is an indication of improving optimism. But even at the current rate at about 55 cents, it still implies a substantial haircut of about 44%. Perhaps, once there is clarity on the consideration and the disposal of the remaining assets, this may improve, too.