Title of the project- Foreign Debt crisis management of RCOM
Batch–PGCBM -21
Centre –DAKC, Mumbai
Name- Rajesh Kumar Verma
Email- rkv3466@gmail.com, rajesh.kr.verma@relianceada.com
SMS No- 110387
SID- RB12044 Table of Contents
1. Introduction
2. Purpose of the assignment
3. Gratitude to Professor and support staff
4. Introduction of IFM Assignment topic- Foreign Debt Crisis Management of RCom
5. Company Profile
6. Assignment analysis and study
A. Reliance Communications has secured loans from a host of Chinese banks to refinance $1.18 billion
B. RCom has filed a prospectus with the Singapore Stock Exchange and plans to divest as much as 75% stake in Flag Telecom to raise about $1 Billion
i) Background of Reliance Globalcom (Flag Telecom) ii) Cable network of Flag Telecom iii) Solutions offered by Reliance iv) Strategic Move by Reliance to fight with debt crisis
C. Reliance Communications has put on hold the initial public offering of its undersea cable unit Flag Telecom in Singapore
D. Impact of heavy debt on company's financial credit worthiness and impact of rupee devaluation on overseas loan
E. The impact of the high-debt levels has been further compounded because of the steep depreciation of the rupee
7. Impact of Un-hedged foreign currency debts due to rupee devaluation
8. Conclusion
INTRODUCTION
As a student of International Finance Management (IFM) I am glad to learn the concepts, principles and methodologies of the subject. I am a Telecom professional and working with Reliance communications at Mumbai, I wish to present my IFM assignment on the Debt crisis management by RCom and impact of un-hedged exposure aspects of RCom – a major Telecom Service provider in India.
PURPOSE OF THE ASSIGNMENT
The purpose of this assignment is to comply with the comprehensive assignment as part of academic curriculum.
GRATITUDE TO THE PROFESSOR AND SUPPORTING STAFF
I am extremely grateful to our professor Dr H K Pradhan for sharing his invaluable guidance, experience and mentoring. I am also very thankful to Mrs. Nitu Prasad and the various coordinators for helping us in completing my course.
Introduction of IFM Assignment topic – Foreign Debt crisis management of RCOM
The topic of assignment is to study the debt crisis management and impact of un-hedged exposure aspects of RCom – a major Telecom Service provider in India.
RCom has entered in high-debt levels i.e Rs 35000 crore and it has been further compounded because of the steep depreciation of the rupee, where nearly three-fourths of Loan is in foreign currency.
RCom has implemented refinancing strategy for the loan outstanding by Industrial and Commercial Bank of China (ICBC), China Development Bank (CDB), Export Import Bank of China (EXIM), and other banks. This strategy will be benefited from extended loan maturity of seven years and attractive interest cost of about 5 per cent and the loan would be used for refinancing the entire redemption amount of FCCB. In this assignment, I have studied the financial crisis management part which is managed by the company with some strategic move of loan refinancing and a smart move of fund raising through listing of Flag telecommunication at Singapore and set an indicative price range for the Singapore initial public offering of its undersea cable unit (Flag Telecommunication) that could raise as much as $1 billion and help to reduce its debt load. I have also studied the impact of heavy debt on company's financial credit worthiness and impact of rupee devaluation on overseas loan taken from China and loss incurred due to huge exposure of un-hedged transactions.
COMPANY PROFILE
Reliance Communications Limited is the flagship Company of Reliance Group, one of the leading business houses in India. Reliance Communications is India’s foremost and truly integrated telecommunications service provider. The Company, with a customer base of 152 million as on March 31, 2012 including over 2.5 million individual overseas retail customers, ranks among the Top 4 Telecom companies in the world by number of customers in a single country. Reliance Communications corporate clientele includes over 35,000 Indian and multinational corporations including small and medium enterprises and over 800 global, regional and domestic carriers. Reliance Communications has established a pan-India, next generation, integrated (wireless and wire line), convergent (voice, data and video) digital network that is capable of supporting best-of-class services spanning the entire communications value chain, covering over 24,000 towns and 600,000 villages. Reliance Communications owns and operates the world’s largest next generation IP enabled connectivity infrastructure, comprising over 277000 kilometers of fiber optic cable systems in India, USA, Europe, Middle East and the Asia Pacific region.
Assignment analysis and study
RCom has entered in high-debt levels i.e Rs 35000 crore because of high capital investment for changes in industry landscape, rapid emergence of newer business opportunities like 3G, mobile broadband data, etc, and evolving regulatory framework. RCom continues to actively evaluate and execute the most relevant organization structure to address the market opportunity.
In the 2 years, RCOM has taken several measures to reduce its mounting debts.
1. Reliance Communications has secured loans from a host of Chinese banks to refinance $1.18 billion worth of outstanding foreign currency bonds due for redemption. The deal has provided RCOM a major support, where company is trying for more than a year to sell its telecoms tower unit to cut the company's about $6.5 billion debt. Reliance Communications said Industrial and Commercial Bank of China, China Development Bank Corp, Export Import Bank of China and other banks were funding the refinancing of the outstanding foreign currency convertible bonds (FCCBs). The company said it would benefit from extended loan maturity of seven years and "attractive" interest cost of about 5 percent, sending its shares up as much as 5.7 percent in a Mumbai market that rose 1.5 percent.
The FCCBs were issued in February 2007 when the Indian markets were booming, with a conversion price of 654 rupees a share. Cut-throat competition among India's mobile phone operators has since hit earnings and shares have plunged. Reliance Communications shares were trading around 90 rupees, a fraction of the conversion price. Reliance Communications has talked with China Development Bank for a syndicated loan to redeem the bond.
China Development Bank arranged loans worth $1.93 billion for Reliance Communications, which the company used to finance radio airwaves it acquired during a costly 3G auction, as well as for the purchase of equipment.
With its bruising debt load and a ferociously competitive 15-operator market, Reliance Communications has reported eight straight quarters of falling profits. Reliance communications has tried once again and talked with U.S. buyout giants Carlyle Group and Blackstone Group on a deal for the towers business which could be worth more than $3 billion, but unfortunately the deal is not closed to completion.
2. RCom has filed a prospectus with the Singapore Stock Exchange and plans to divest as much as 75% stake in Flag Telecom to raise about $1 Billion- Reliance Communications was looking to secure a leasing agreement for its towers from Reliance Industries, before pressing forward with a tower sale. It has also not settled. The efforts to sell a majority stake in Reliance Infratel are still to fructify, in the mean time company has decided the listing of Reliance Globalcom., where the Reliance Globalcom can help the company to raise Rs 50 billion-Rs 65 billion by divesting 75 per cent stake in its submarine cable business.
The issue has opened at a price range of $1.09-$1.32 per unit. The bankers for the issue include Deutsche Bank, DBS of Singapore, Standard Chartered and the Industrial and Commercial Bank of China. Reliance Globalcom will be listed under the business trust structure. Post the listing, the company’s submarine assets and business will continue to be controlled by the existing management. RCOM will continue to hold the remaining 25 per cent equity stake.
A. Background of Reliance Globacom
Reliance Globalcom was formed in 2003 as a result of an amalgamation of Flag Telecom with the Reliance Group for $207 million. Flag, which had emerged from bankruptcy proceedings and had been on the block for over a year before being acquired by Reliance, was reeling under losses. However, the acquisition gave Reliance a foothold in the global business arena with over 50,000 km of submarine cables, thereby ending Tata Communications’ monopoly in the undersea cable field.
From 2005, Flag embarked on an expansion path and finally broke even in September 2006. It introduced several higher-value-added products, including international private leased circuits (IPLCs), virtual private networks (VPNs) and Ethernet services. This accelerated the company’s revenue growth and increased its profitability.
Flag Telecom later came into the fold of RCOM, led by Anil Ambani, after the Reliance Group’s businesses were split between the brothers, Mukesh and Anil Ambani. In 2008, the company was integrated into RCOM’s international operations under the Reliance Globalcom brand.
B. Cable network of Flag Telecom
Reliance Globalcom owns the largest private cable network in the world with over 277,000 route km of fibre optic cables. This includes 68,000 km of subsea fibre. Through strategic relationships with over 750 network service providers across the world, Reliance Globalcom provides assured connectivity to 163 territories worldwide. This makes RCOM a carrier’s carrier as it provides global connectivity solutions to carriers and internet communities through its submarine cable system. The company has cable landing tie-ups across 46 locations in 26 countries with 31 partners.
The company’s global backbone spans four continents, connecting key business markets in Asia, Europe, the Middle East and the US. The network consists of five cable systems – FLAG Europe Asia (FEA), FLAG North Asian Loop (FNAL), FLAG Atlantic 1 (FA-1), FLAG Alcatel-Lucent Optical Network (FALCON) and HAWK. The company also owns and operates a low latency, global MPLS-based IP network, which connects most of the world’s principal international internet exchanges.
FNAL represents a part of the 9,800 km North Asian Loop submarine, an intra-Asia submarine cable system that links Japan, Korea, Taiwan and Hong Kong in a ring configuration. The entire FNAL submarine cable system consists of six pairs of fibre, three of which are owned by Reliance Globalcom. In August 2011, Reliance Globalcom upgraded FNAL to a 40G submarine network, to introduce 10G local area network physical topography and optical transport network services.
The FEA cable system links the telecom markets of Western Europe and Japan through the Middle East, India, Southeast Asia and China. FALCON is a high capacity, resilient loop cable system that provides multiple landings throughout the Gulf region, with submarine links to Egypt in the west and Hong Kong in the east. Launched in February 2004, FALCON commenced commercial operations in September 2006.
In 2011, Reliance Globalcom launched HAWK, its next-generation submarine cable system connecting Marseille in France to Alexandria in Egypt, terminating at the cable landing station of Cyprus based-PrimeTel. The HAWK cable system seamlessly integrates with Reliance Globalcom’s global submarine network and European backhaul network, extending the coverage from Marseille to London, Paris and Frankfurt. This new cable system offers significantly lower latency between Cyprus and London compared to the existing cable systems. It has a capacity of 2.7 Tbps and spans a distance of about 3,181 km.
C. Solutions offered by Reliance
Reliance Globalcom provides a host of solutions to its clients in diverse locations worldwide. These include a full suite of connectivity and infrastructure services such as IPLC, Ethernet private line, Ethernet private point-to-multipoint, managed premium internet, MPLS VPN, global Ethernet and global Ethernet VPLS. It also offers managed wide area network services as well as business solutions including managed contact centre services, application/content delivery networks, security services, co-location application-aware networking solutions. The wholesale services include managed bandwidth services, capacity services and IP transit services. Reliance Globalcom’s data centres support active application management, content distribution and cloud computing services in addition to managed services.
To ensure faster disaster recovery, Reliance Globalcom operates a resilient global network operations centre (GNOC) hierarchy. It operates a primary GNOC in Mumbai, a secondary one in the UAE to provide support on the FEA system, a geographically diverse disaster recovery GNOC in London as well as regional network maintenance centres located in the US, Europe and Asia.
As part of its retail voice offering, Reliance Globalcom provides virtual international calling services to retail customers for calls to 200 destinations including India under the Reliance Global Call brand. Its retail services are available in several countries including the US, Canada, the UK, Australia, New Zealand, Hong Kong and Malaysia. Currently, Reliance Globalcom serves over 2,100 enterprises, 200 carriers and over 3 million retail customers across 160 countries and five continents.
D. Strategic Move by Reliance to fight with debt crisis
While there were talks to list Reliance Globalcom in 2008, the plan had to be shelved due to the economic crisis. The decision to list the company now is a valid move by RCOM, which is in urgent need of funds to ease its huge debt. RCOM is optimistic that the business strength of Reliance Globalcom as well as the company’s diverse presence will ensure that the IPO receives a positive response from investors.
Besides bailing out RCOM from its huge debt, the company will continue expanding its enterprise carrier model in emerging markets for greater connectivity across the world, particularly in light of outsourcing of IT and IT-enabled services from developed economies to low-cost markets.
Further, undersea cable networks, which carry over 95 per cent of the international telecom traffic, are vital for global commerce. With the global IP traffic set to witness a steep rise, the future of Reliance Globalcom’s operations looks promising. Reliance planned to list its FLAG undersea unit as a business trust (BT) in Singapore might be to the detriment of the company's shareholders in India. RCom has filed with SGX (Singapore stock exchange) to raise around $1.5 billion (Rs 7,500 crore) by listing FLAG as BT. It will most likely place 75 per cent of FLAG's equity through the offering. While unit holders of the BT might benefit from the dividend they get, this will be at the expense of RCom's shareholders in India.
The reason is that the BT structure allows for payment of returns to unit holders out of operating cash flows. So, even if the company does not have accounting profits, it can still pay the unit holders of its BT.
3. Recently, Reliance Communications has put on hold the initial public offering of its undersea cable unit Flag Telecom in Singapore because of adverse market conditions.
“The company states that it will await supportive market conditions and easing of prevailing global uncertainties to proceed with the offering or listing at an appropriate time in the future, in order to unlock the full value of the Flag Telecom assets,” RCom said in a statement.
The IPO, which was raised about USD 1 billion, was put on hold on a day when institutional book building was to close. RCom was looking at listing Flag Telecom through a Singapore business trust, Global Telecommunications Infrastructure Trust (GTIT) on the Singapore stock exchange. “Subsequent updates will be provided to the stock exchanges and relevant authorities in due course,” updated by Rcom.
GTI Trust owns four subsea cable systems that carry Internet traffic and data around the globe. Deutsche Bank AG, DBS Group Holdings Ltd, Industrial & Commercial Bank of China Ltd and Standard Chartered Plc were lead managers for the offering. The company had extended the closing date for institutional book-building process.
The telecom major had planned to use the proceeds from the Singapore listing of GTI to pare some of its Rs 35,839.3 Crore debts.
As per the current scenario, RCom said that they are not in a rush to sell the assets and can afford to wait for positive market conditions, as it has already refinanced its FCCB of USD 1.2 billion in March with long term Chinese loan.
RCom has been exploring various routes of raising funds, including selling stake in its telecom tower arm Reliance Infratel, a move that will help the company retire a major chunk of debt on its books. In the recent AGM it has been stated by Chairman that after the reissuing of license in Jan 2013 by the govt. RCom will decide to go for the public issue for Reliance Infratel and that will substantially support for closing the piled up loan.
4. Impact of heavy debt on company's financial credit worthiness and impact of rupee devaluation on overseas loan taken from China and loss incurred due to huge exposure of un-hedged transactions
Telecoms carrier Reliance Communications' net debt fell to $6.4 billion at the end of June from $7 billion at the end of March, it said in its quarterly report. The company, saddled with heavy debt, on Saturday reported a smaller-than-expected 3% rise in its first-quarter profit, weighed down by higher finance costs.
The rating agency ICRA has downgraded Reliance Communication’s long term rating from ‘stable’ to ‘negative’. ICRA is concerned about the high level of debt – Rs 37,000 crore, at the end of last year – and the “challenging operating environment”. 5. The impact of the high-debt levels has been further compounded because of the steep depreciation of the rupee, says ICRA, pointing out that nearly three-fourths of RCom’s debt is foreign currency denominated. It further notes that while the ‘rate per minute’ has stabilized at around 44 paise in the last few quarters, the ‘minutes of usage’ for the company has declined from 262 minutes per subscriber per month in 2010-11, to 229.
Correspondingly, the ‘average revenue per user’ (ARPU) has declined from Rs 116 in 2010-11 to Rs 102 in the next year. ICRA further observes that the off take of the 3G service is unlikely to materialize in the near term.
Furthermore, the regulatory environment is “uncertain” and there are concerns over issues such as onetime payment for excess spectrum, spectrum pricing and license renewal fee. It further impacted the cancellation of 122 telecom licenses by the Supreme Court, It has also impacted RCom’s plans to sell stake in its subsidiary Reliance Infratel.
Reliance Communications, once among the top companies in the country based on market capitalization, has been reporting sluggish revenue and profits over the last few quarters. Its June 2012 quarter performance was not encouraging either. Net sales rose a tad by 0.2 per cent to Rs 5,319.2 crore from the quarter ago whereas profit before depreciation, interest and tax rose by 1.1 per cent to Rs 1,650.2 crore. Due to tariff war and lower active user base, the ability of RCom's operations to generate cash has eroded. The company reported Rs 1,108.4 crore of operating cash flows for the June 2012 quarter, lower than Rs 1,510.8 crore three years ago. This is despite the fact that the wireless subscriber base nearly doubled to 15.5 crore during the period. It means the company has been finding it difficult to encash every addition in the user base. Efforts to improve cash generation will be crucial in strengthening its internal accruals, which in turn can be utilised to reduce borrowings.
The company had a debt of RS 37,838 Crore of debt of which 74 per cent is in foreign currency. It means depreciation in the rupee will inflate the size of borrowings. RCom will have to priorities the reduction of its exposure to external debt. For this, the company will either have to improve cash through internal accruals or need to raise capital to repay debt. In the current scenario, each of the options look difficult to implement, which means borrowings are likely to remain high.
RCom has long been trying to divest a stake in its telecom infrastructure segment, which includes telecom towers. The efforts, however, have proven to be futile so far. A slack in global equity market is making things challenging for RCom. A positive development on this front would enable the company to reduce its debt exposure and infuse cash in its wireless business.
6. Impact of Un-hedged foreign currency debts due to rupee devaluation- The exposure to un-hedged foreign currency loans is about Rs 400 crores this is due to rupee has depreciated against the dollar by around 10 per cent. But as per the company, RCom is fully compliant with all applicable accounting policies and standards, adheres to all prescribed governance norms and follows appropriate risk management policies consistent with the long-term maturities of up to 10 years for its foreign currency debt.
Conclusion
Recently on 4th September 2012, Mr Anil Ambani, the Chairman of the Reliance ADAG group has told to the shareholders in AGM 2012 that shares of Reliance Communications BSE 6.84 % surged about 5 per cent after the company said it expects to complete the sale of its tower business next year after spectrum auctions and bring down overall debt by fiscal 2014-15. Due to analysts the stock reacted positively on hopes of debt reduction.
As per chairman, Rcom is to monetize all Reliance assets and increase the cash flow profitability and to be the lowest cost operator in the industry. Going forward, Rcom is committed to unlock value and pursue several initiatives to reduce the overall debt of the company. RCom is expected to achieve a debt-Ebitda level at 3 or even lower by FY15.
The Chairman further said the company expects "to complete tower sale in 2013, after the forthcoming spectrum auctions". The staggering Rs 35,000-crore debt of RCom makes it one of the country's most indebted telecom firms and constitutes nearly 10 per cent of the industry's debt of Rs 3.5 lakh crore. The company is reporting cash flow now and will continue to remain cash-positive in future.
The above commitments and strategic plans will certainly move to RCom as a winning edge over the long staged debts. But currently the company is managing the debt crisis by cost optimization and reducing debt burden by taking fresh low interest loan from china and fund raising through listing of Flag telecom at Singapore. In this process company has faced a further burden due to rupee devaluation on un-hedged exposure of foreign currency debt.
