Rating agencies Fitch and Moody’s on Tuesday downgraded credit rating of Reliance Communications on account of its fragile liquidity position and limited ability to pay back debt.
Fitch downgraded RCom to the lowest category with some hope for recovery of principal or interest amount while Moody’s Investors Service downgraded the firm to the second lowest category.
Moody’s downgraded RCom corporate family rating and senior secured bond rating to Ca from Caa1.
“The outlook is negative,” Moody’s said in a statement.
Credit rating indicates capability of a company to pay back debt. Moody’s rate firms in nine categories ranging from Aaa to C.
Ca rating indicates that obligations in this category are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
Fitch in a statement said, “Fitch Ratings has downgraded India-based Reliance Communications limited’s (RCom) long-Term Foreign- and local-Currency Issuer Default Ratings (IDR) to ‘RD’ from ‘CCC’.
“Fitch has also downgraded the rating on RCom’s $300 million 6.5 per cent senior secured notes due 2020 to ‘C/RR4’ from ‘CCC/RR4’.”
The RD (restricted default) category is too level down from CCC category. The RD indicates that the firm has an uncured payment default on a bond, loan etc but has not entered into bankruptcy liquidation, or other formal winding- up procedure and continues to operate.
The C category of Fitch is the lowest in its credit rating and RR4 symbol indicates that average recovery prospects of current principal and related interest is in the range of 31-50 per cent.
“RCom had poor liquidity at end-March 2017, with cash and equivalents of Rs1,400 crore - insufficient to pay short-term debt of Rs10,900 crore. RCom’s EBITDA declined by 30 per cent to Rs4900 crore in the financial year to end-March 2017 (FY17), from Rs7100 crore in financial year (FY) 2016,” Fitch said.
It added that decline in EBIDTA(cash flow) is likely to be insufficient in FY 2018 to meet annual interest costs of Rs3,500 crore and maintenance capex of Rs1,500 crore.
Moody’s said the ratings are under review for further downgrade.
“The downgrade reflects RCom’s weak operating performance, high leverage and fragile liquidity position. The company’s reported EBITDA has fallen 29 per cent year-over- year, evidencing its weak market position and contracting subscriber base,” Moody’s Vice President and Senior Credit Officer, Annalisa DiChiara said.
The C category, below Ca, indicates that a firm has defaulted on paying back debt and there is little prospect for recovery of principal or interest.
About a week back, Moody’s had downgraded RCom rating to Caa1 from B2. Apart from Fitch and Moody’s, two other agencies ICRA and CARE have also revised their ratings on the company’s loan facilities recently.