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Moody's: Sale of towers, if consummated, will support RCOM's ratings

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Moody's Investors Service says that Reliance Communications (RCOM)'s announced transaction to sell its tower assets, held under its subsidiary, Reliance Infratel (RITL) when consummated will substantially improve the company's financial profile and support its Ba3 ratings and stable outlook.

On 4th December, RCOM announced the signing of a non-binding Term Sheet with Tillman Global Holdings and TPG Asia in relation to the proposed acquisition of RCOM's nationwide tower assets and related infrastructure by Tillman and TPG.

­Based on precedent tower transactions in India, Moody's expect a transaction value of about USD3.35 billion for the sale of approximately 43,500 towers owned by RITL. They assume certain debt will be transferred to the new tower company, and RCOM will use the remaining sales proceeds to reduce balance sheet debt.

"While RCOM's operating costs for its towers will decline, its rental costs for leasing back the towers will increase its consolidated lease expense, which we capitalize and add to gross debt. However, given the lease rentals for towers in India are relatively low, there will be a substantial reduction in RCOM's adjusted gearing," says Nidhi Dhruv, a Moody's Assistant Vice President.

Given RCOM's public commitment to use the sales proceeds only for debt reduction, the transaction will enable the company to meet its deleveraging target of around 4.0-4.5x for its rating level before the fiscal year ending March 2017.

"Cash proceeds from the sale of towers will also alleviate liquidity and refinancing pressures for RCOM. However, we note that the company needs to obtain approvals from banks and bond holders to carve out the tower assets from the respective collateral packages," adds Dhruv, also Moody's Lead Analyst for RCOM.

Although there could be potential for acceleration of certain bank loans as a result of this transaction, Moody's takes the view that repayment risk would be manageable with the tower sale proceeds.

The exclusivity agreement with Tillman and TPG is valid till 15th January 2016. The proposed Transaction is subject to final due diligence, definitive documentation, and applicable regulatory and other approvals. RCOM expects the transaction to close within the first quarter of FY2017.

In the event of any technical, procedural or regulatory constraints on the proposed transaction, or delays in announcing the final transaction there will likely be imminent downward pressure on the rating.

Downward pressure on the ratings could also emerge if RCOM (1) experiences a significant deterioration in market share and/or competition intensifies, such that profitability deteriorates; (2) fails to execute on its deleveraging plans in a timely manner; (3) encounters difficulty in complying with its financial covenant requirements, accessing capital to fund growth or repay/refinance debt, as and when it falls due; or (4) implements aggressive investment and/or shareholder return policies.

Specific indicators that Moody's would consider for a downgrade include: adjusted debt/EBITDA failing to trend in line with expectations towards 4.0x by June 2016; adjusted EBITDA margins falling below 30%; and adjusted (Funds from operations + interest)/interest remaining below 3.0x. Furthermore, any unexpected regulatory developments in the Indian telecommunications sector will also be negative for the rating.

While unlikely over the near term, upward rating pressure could be driven by an improvement in the underlying business and arise if RCOM (1) continues to grow its core-Indian operations' revenues and earnings by expanding the number of subscribers and data revenue without compromising its EBITDA margins; (2) continues to generate positive free cash flow (FCF) on a sustained basis; and (3) significantly improves its liquidity profile.

Specific indicators that Moody's would consider for upgrading the ratings include: adjusted debt/EBITDA below 3.0x; adjusted EBITDA margins in excess of 35%; and adjusted FCF/debt in excess of 5% on a sustained basis

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