Investors in both bond and stock markets have become increasingly jittery about Reliance Communications Ltd’s (RCom’s) high leverage. Its shares have fallen more than 15% this week, after Credit Analysis and Research Ltd downgraded the credit rating on some of RCom’s long-term and short-term debt late last week.

Earlier, Debtwire, a news service for finance professionals in the fixed income market, reported that RCom was late in making debt payments by months and was in talks with banks to explore payment options. Bloomberg first published key highlights of Debtwire’s report. On Singapore Exchange, prices of bonds issued by RCom and subsidiary GCX Ltd have corrected sharply in the past few trading sessions.

But RCom has been debt-laden for years now; what has changed? As the chart alongside shows, cash generation has fallen considerably this year, and wasn’t sufficient to cover capital expenditure (capex) and interest payments.

Earnings before interest, tax, depreciation and amortization (Ebitda) declined by over a fourth to Rs4,064 crore in the first nine months of the year, thanks largely to the sharp drop in tariffs after Reliance Jio Infocomm Ltd’s launch last year.

Besides, a large increase in working capital led to negligible cash flow from operations. And although RCom has cut down on capex by nearly half (target of Rs2,000 crore this fiscal year), interest costs amount to nearly Rs900 crore on a quarterly basis. Reports that the firm is strapped for cash are hardly surprising.

Also Read: Reliance Communications shares plunge on debt concerns

Based on annualized earnings for the first three quarters, the company’s net debt of Rs42,800 crore is well over 7.5 times Ebitda. Regardless of how one looks at it, RCom’s finances are in a mess.

One silver lining is the sale of its tower assets to Brookfield Infrastructure Group for an upfront payment of Rs11,000 crore and non-voting shares amounting to a 49% stake. When this cash flows in, RCom can retire about a fourth of its debt, which will ease its interest burden meaningfully. The Bloomberg report quoting Debtwire said RCom has asked the banks to wait for payment until it completes the spin-off of its wireless services business and the separate sale of its tower business.

Still, with debt of nearly Rs32,000 crore remaining, and a tight repayment schedule for the next few years, RCom’s troubles will remain. The said spin-off of its wireless business into a separate firm that will include the wireless business of Aircel Ltd is nothing but a mirage as far as RCom’s debt goes. Both companies will bring in debt of around Rs14,000 crore to the new entity, although RCom will also be hiving off the majority of its profit-generating business.

Analysts are sceptical whether its remaining businesses such as the undersea cable business will be able to service the remaining debt after the hive-off. And the fact remains that RCom will not be really rid of the troubled telecom business. It will hold a 50% stake in the merged firm, and to that extent, its troubles and fortunes will be reflected in its valuations.

As pointed out in this column earlier, Jio’s launch has had the worst impact on relatively smaller telcos such as RCom and Aircel. These firms typically have high leverage and operate at relatively lower profit margins. Any hit on profitability hurts them far more than larger companies such as Bharti Airtel Ltd.

One of them, Telenor, even decided to exit the India business by handing it on a silver platter to Airtel. Leave alone receiving any value for its equity, Telenor also offered to service the outstanding debt of its Indian subsidiary before the handover.

The sharp drop in RCom’s shares, which now trade at Rs25.90 apiece, reflects some of this apathy.

Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay High court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.