Reliance 3G Bond Risk Tumbling as Loans Fund License Binge: India Credit

Reliance Communications Ltd.’s creditworthiness is improving at the fastest pace since June as it refinances $1.9 billion of debt and investors gain confidence in the ability of Indian cell phone companies to fund record spending.

Credit-default swaps on India’s second-largest mobile phone operator dropped 109 basis points last week to 421 basis points, the most since the five days ending June 18, according to prices quoted by CMA. Billionaire Anil Ambani’s company approached banks seeking dollar funding to cut costs, a person with direct knowledge of the plan said Oct. 11.

Indian mobile operators such as Tata Teleservices Ltd. need to persuade lenders they can repay almost 1 trillion rupees ($22 billion) of debt after bidding twice as much as the government projected for third-generation mobile phone licenses. Reliance Communications bond risk reached 766 basis points on June 8, a level comparable with that of European phone companies when they loaded up on debt to pay $100 billion for permits to offer faster services.

“The company is witnessing a revival in its mobile services business,” said Piyush Choudhary, an analyst at Indiabulls Securities Ltd. in Mumbai. “Reliance Communications’ cash-flow ability is expected to improve since the peak capital expenditure cycle is behind it.”

Default Swaps

A decade ago, France Telecom SA and Deutsche Telekom AG bid so aggressively for European 3G licenses that they reported record losses. Credit swaps on France Telecom debt surged to 638 basis points in June 2002 and have since fallen to 61. Reliance Communications swaps trade at 416, the highest among Asian mobile phone operators tracked by CMA.

Tom Wright, a spokesman for France Telecom in Paris, declined to comment.

Philipp Blank, a spokesman for Deutsche Telekom, said the company couldn’t comment on auctions or companies involved in auctions in other countries.

A one basis-point increase on a credit-default swap protecting $10 million of debt from default for five years costs the investor who wants to buy a contract an extra $1,000 annually. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Competition among 15 phone companies including Bharti Airtel Ltd. and Vodafone Group Plc’s Indian unit has already driven call rates as low as one U.S. penny a minute. The nine Indian operators were forced to seek short-term financing to pay $11 billion for 3G licenses in May.

Ambani said at an annual shareholders meeting on Sept. 28 that he aims to rid his flagship company of debt within three years in part by cutting capital expenses and selling the Reliance Infratel Ltd. tower unit.

Debt Triples

Reliance Communications’ net debt more than tripled to about 310 billion rupees as of Sept. 30, from 100 billion rupees on March 31, 2008, according to ICRA Ltd., a New Delhi-based affiliate of Moody’s Investors Service.

The company reported a record 85 percent drop in profit in the quarter to June. Net income at competitor Bharti Airtel, the nation’s biggest operator, fell 32 percent as it increased investment in Africa to counter slowing growth in India.

“As long as their operating performance supports their ability to service debt, they shouldn’t face any constraints with refinancing,” said Manoj Mohta, head of Mumbai-based Crisil Research, a unit of McGraw-Hill Cos.

‘Top Pick’

Reliance Communications is the worst-performing stock over the past 12 months in the 89-company Bloomberg World Telecommunications Index, falling 12 percent. The index gained 6 percent in the same period.

The stock’s slide makes it attractive for investors as the operator focuses on expanding its coverage in the world’s second-biggest wireless phone market, UBS AG analysts led by Suresh Mahadevan wrote in a note to clients on Oct. 11. Gartner Inc. predicts mobile services in India will grow at an annual rate of 17 percent in the four years through 2013.

The company is “well-positioned to ride the wireless data boom,” UBS said, adding it has the potential to cut debt in coming years with more free cash flow. “Reliance Communications is our top pick in the India mobile phone sector as it has been a big laggard.”

Combined Burden

Himanshu Shah, an analyst with HDFC Securities Ltd. in Mumbai, estimates the industry’s combined debt burden has peaked at 1 trillion rupees, according to a Sept. 20 note to clients.

Tata Teleservices, the Indian partner of NTT DoCoMo Inc., said on June 2 it plans to borrow as much as 20 billion rupees to expand its existing network, a week after Idea Cellular Ltd. said it’s looking to raise foreign-currency debt.

Dollar-denominated debt sales in India this year reached $7.4 billion as of Oct. 11, up from $1.5 billion in the same period in 2009. Local-currency sales in India reached 1.51 trillion rupees, versus 1.48 trillion rupees for all of 2009 as the extra yield top-rated companies must pay to borrow for five years in relation to the government’s cost narrowed to 66 basis points from 87 at the end of last year, according to data compiled by Bloomberg.

The yield on India’s benchmark 10-year bond has climbed 16 basis points this month and 45 basis points since the end of May to 8.01 percent. Similar-maturity bonds yield 3.4 percent in China, 7.34 percent in Russia and 12.16 percent in Brazil. A basis point is 0.01 percentage point.

‘No Concern’

The rupee has gained 4.1 percent this year and 3.8 percent since May, reaching 44.68 per dollar yesterday. The currency will climb 3.4 percent to 43.2 by the end of 2011, according to the median forecast in a Bloomberg survey of 14 analysts.

Reliance Communications started talks other potential investors after a non-binding agreement with GTL Infrastructure Ltd. to sell 50,000 phone towers lapsed on Aug. 31. The operator is also considering an initial public offering of its tower unit, it said in an e-mail on Sept. 6, without specifying names.

The board has given preliminary approval for the sale of a 26 percent stake to a strategic or private equity investor, the company said June 6.

“A combination of strategic and financial initiatives would result in a large cash infusion and significantly bring down debt levels in the next few quarters,” Ambani told shareholders on Sept. 28.

Risk assessor ICRA has a long-term rating on Reliance Communications of LAA+, its second-highest, meaning “high safety” with “modest” risks.

“There’s no concern over its ability to repay its debt,” said Vikas Aggarwal, an analyst at ICRA. “It’s also part of the Reliance group, which gives it significant flexibility.”