China loan for Reliance Communications

Reliance Communications, India’s debt-stricken mobile phone operator, announced it would receive a $1.93bn loan from China Development Bank on the day China’s premier Wen Jiabao arrived in New Delhi for a state visit to boost ties between the two emerging economic powers.

The new loan, signed on the sidelines of an India-China summit on Wednesday, will help India’s second-largest mobile operator by subscribers repay the outstanding loans it took to acquire 3G spectrum this year.

This is the latest in a series of multibillion-dollar loan agreements clinched with Beijing by Indian billionaire industrialists, as Chinese banks offer much cheaper credit than Indian institutions.

Reliance Power, which is also run by Anil Ambani, one of India’s richest men, this year ordered $10bn of power generation equipment from Shanghai Electric Groupin a deal heavily financed by Chinese banks.

Reliance Power said on Wednesday it had received final commitment from Chinese banks for $1.1bn of loans.

“The Chinese do a great job when it comes to financing deals,” said an executive at Reliance Communications. “We save about $100m a year compared to what we would [have to pay in interest] in India – that’s a lot of money.”

Reliance will pay 5 per cent interest to China Development Bank, compared with the standard 12 per cent it would have to pay an Indian bank.

“Obviously, the Chinese then expect us to give something back, so we will buy their [equipment] but that works well for us,” the executive added.

Reliance has net debt of almost $7bn, giving it a ratio of net debt to earnings before interest, taxation, depreciation and amortisation of 4.4 times, according to GV Giri, an analyst with IIFL, a Mumbai brokerage.

Its competitors, Bharti Airtel and Idea, have debt of about two-thirds or less of this level.

Nearly 70 per cent of the 10-year loan would go to repay Reliance’s short-term debts, while the remainder would be used to acquire Chinese telecoms equipment, said another person close to the Indian company.

Reliance’s financial woes deepened in September when a $9bn deal aimed to reduce debt and attract new investors collapsed.

It had planned to sell its tower assets to Indian group GTL Infrastructure, in a deal that would have prepared it for a possible stake sale to Gulf rival Etisalat.

Reliance launched 3G services in four cities including Mumbai, Delhi, Kolkata, and Chandigarh on Monday.

It spent about $1.9bn to acquire 3G spectrum in 13 cities this year.

India’s telecoms sector is one of the world’s fastest-growing mobile markets with almost 700m subscribers. It is among the most competitive, with 15 operators vying for market share.