Vodafone Idea seeks bankers’ approval to dilute collateral

Vodafone Idea Ltd has asked its lenders to give up their first charge on the collateral so that the cash-strapped telco can raise fresh funds from investors, two bankers aware of the matter said.

The company, saddled with liabilities of ₹1.8 trillion, is looking to raise nearly ₹25,000 crore from international investors using the securities placed as collateral with banks. It has borrowed close to ₹23,080 crore from banks and financial institutions.

Lenders have, instead, asked the promoters of the company to bring in additional equity capital. “Several investors who are exploring the possibility of investing a mix of debt and equity in Vodafone Idea have sought guarantees from the company in the form of collateral, the first charge on almost all of which is held by the company’s existing lenders,” a banker directly aware of the matter said on condition of anonymity.

“One of the proposals put forth by the company is to request banks to dilute their charge on the security. While many banks are not too keen about this option, banks want to know whether this could be a long-term solution to Vodafone Idea’s problem,” said the banker.

Vodafone Idea’s precarious financial situation underscores the immediate need for another round of tariff increases after a brutal price war triggered by the entry of billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd in 2016 left telcos bleeding. But even as the telecom industry was going through turmoil, the Supreme Court asked telcos to pay the government billions of dollars in licence fee dues in 2019. Vodafone Idea was the worst hit by the order.

On 3 July, the Business Standard newspaper reported that Vodafone Idea breached loan covenants with lenders on 30 June. The company sought a waiver against the breach of covenants from banks, it said.

According to the second banker, lenders to Vodafone Idea are likely to allow a waiver against the breached covenants.

“We will give some relaxation to the company to help them tide over the matter,” he added.

Vodafone Idea’s biggest lenders include State Bank of India, IndusInd Bank and Yes Bank.

On 2 July, Mint reported that lenders to Vodafone Idea believe the government must step in to rescue the telco and that a debt recast would be of little use. This is because the bulk of banks’ exposure to Vodafone Idea is not in the form of term loans, which can be restructured, but non-fund-based guarantees. Moreover, banks are unwilling to lend any more to the mobile phone operator as financial stress due to low telecom tariffs will render any such infusion meaningless, it added.

The company reported that excluding lease liabilities, it owed the government and banks a total of ₹1.8 trillion as of 31 March, including deferred spectrum payment obligations of ₹96,270 crore and adjusted gross revenue (AGR) liability of ₹60,960 crore. Besides, a Care Ratings report pointed out on 7 January that it also had term loans of ₹13,826 crore and guarantees and letters of credit of ₹23,737 crore. The rating agency downgraded the company in January and placed its long-term ratings on credit watch with negative implications on account of the ongoing evaluation of the fundraising option towards network expansion and paying adjusted gross revenue dues from FY22 onwards.

“The firm wasted time taking action on its stressed financial situation. The option before the company is to either bring in equity or file for insolvency under the insolvency and bankruptcy code,” said a third banker.

Vodafone Idea declined to comment.

According to a CLSA note to clients, the telecom company is headed for a crisis when annual payments become due.

It is not just the lenders who are concerned about tariffs. News agency Press Trust of India reported Bharti Airtel Ltd chairman Sunil Mittal as saying on 1 July that tariffs need to go up because of the tremendous stress in the telecom sector, and Airtel will not hesitate to raise prices, but it will not do so unilaterally.