RCom bonds sink on fears over repayment of debt

MUMBAI: Bonds sold by billionaire Anil Ambani’s Reliance Communications (RCom) completed their worst week in more than two years after a slump in the company’s shares added to concern over its ability to cut debt, reducing the allure of Indian securities. The tumble in RCom’s assets is undermining investor confidence in India.

Investors will be “selective” in buying Indian debt, said Heather Beattie, a London analyst with Barclays Capital.
Ambani’s group, which suffered a $2.6 billion drop in its market value on February 9, said last week investigators have questioned some of its executives and that it has identified brokers spreading “sensational charges”.

The yield on India’s second-largest mobile phone operator’s zero-coupon convertible notes due March 2012 jumped 317 basis points to 10.75% last week, the highest since December 2009, Nomura Holdings prices show.

“It’s a minefield at the moment,” said Peter Reinmuth, who manages $300 million of Indian convertible debt, including RCom, as senior portfolio manager at Fisch Asset Management AG in Zurich. “It’s not building confidence, especially for foreign investors.”

The yield on the convertible bonds of Mumbai-based Gitanjali Gems due November 25 rose 30 basis points last week to 12.53% on February 11, the highest since November 25. The yield on Videocon Industries’ 6.75% convertible maturing in December 2015 rose 183 basis points last week to 10.84% on February 11.

Relative yields on India’s top-rated five-year rupee company debt rose 23 basis points this year to 115 more than similar-maturity government bonds, according to data compiled by Bloomberg. They touched 130 on February 7, the highest since October 2009, as investors shunned riskier securities.

RCom’s net debt increased to about Rs 29,200 crore ($6.41 billion) as of September 30, from Rs 3,370 crore at the end of September 2007, according to the company’s quarterly reports. The company has Rs 2,730 crore of debt due for repayment this year, or 59% of its profit last year. A further Rs 5,510 crore are due in 2012.

Reliance Infrastructure, has Rs 9,800 crore of debt, of which Rs 1,650 crore is maturing this year. Reliance Power has Rs 53,500 crore of obligations. About 70% of the generator’s debt matures after 2024.

Overseas investors thought Anil Ambani was heading businesses “which would outstrip growth in the medium and long term”, AS Thiyaga Rajan, senior managing director at Singapore-based Aquarius Investment Advisors, said. “But that has not happened.”

The February 9 share plunge, led by a 14% drop in Reliance Infrastructure, dragged India’s benchmark Sensitive Index to a seven-month low that day. “This should really only affect the stock, it shouldn’t affect the bond after some near-term weakness because Reliance Communications still has options to raise money,” said Atul Gharde, credit analyst at SJS Markets in Hong Kong.

“As far as the company not redeeming the bond, I don’t see that as an issue. North of a 10% yield, the bond is interesting.”

The company was in talks to sell a stake or do an IPO of its mobile-phone tower unit after negotiations to sell it to GTL Infrastructure collapsed on August 31. RCom will borrow $1.93 billion from China Development Bank Corporation. The loan would have a 10-year maturity and would be funded by a syndicate including CDB and other Chinese banks.