Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

News of Reliance Communications Ltd.'s missed coupon payment rattled the wrong guys.

Holders of the Indian telecom firm's 6.5 percent dollar bonds got unnerved when the folks who should really be quaking in their boots are the lenders. Most of the company's $7 billion in total liabilities is to banks. But do the 17 local financial institutions who're on the hook, according to a ratings company report cited by BloombergQuint, care about getting repaid?

Stressing Out
Reliance Communications' missed coupon payment has rattled bondholders. Banks, not so much
Source: Bloomberg

Not really. Or at least not until December 2018. They've got the comfort of SDR, you see.

Raghuram Rajan, the former central bank chief, concocted "strategic debt restructuring" as a halfway house in 2015. India's gigantic bad-loan problem was becoming intractable in the absence of a legal process. (The bankruptcy code showed up only last year). So the idea was to prescribe rules under which banks would convert a part of their debt into equity, and take control of management. This, it was assumed, would ratchet up the pressure on business families.

Critics had even then argued that by allowing banks to continue to classify such restructuring cases as standard accounts for 18 months, the banking regulator was simply letting the extend-and-pretend game continue. RCom, controlled by billionaire Anil Ambani, is a good example the skeptics were right.

A few months ago, RCom banks agreed to convert a part of their loans into equity. The price they agreed on was 24.71 rupees (38 cents), the 10-day average closing price prior to June 2, the reference date for the restructuring. The market price of those shares is about 35 percent lower now because a lot has changed.

Back in June, RCom was talking about merging its wireless operations with Malaysian tycoon T. Ananda Krishnan's Aircel Ltd. With that deal going south, the sale of RCom's mobile towers to Brookfield Asset Management Inc.'s infrastructure unit will also have to be renegotiated. And if all this wasn't enough, RCom has decided to shut its 2G and 3G consumer wireless businesses by the end of the month and say goodbye to an estimated 75 million users. It's also selling off its direct-to-home TV operation.

Can Everybody Go Home Happy?
Reliance Communications had gross debt of about $7 billion at the end of March, and little cash; but the company says it has a "zero loan write-off plan" for lenders
Source: Company filings

Lest banks worry about erosion of value, RCom has presented them with a "zero loan write-off plan." Under it, lenders would convert 70 billion rupees of debt for 51 percent equity in the new RCom, a business-to-business operation with 60 billion rupees in liabilities. Sales and commercial development of real estate would fetch another 100 billion rupees. A further 170 billion rupees would come from selling towers, spectrum and fiber assets.    

With checks flying in from every direction, all that State Bank of India and other financial institutions have to do is just sit there as majority shareholders and collect.

Whether the plan is credible or not, Indian lenders won't want to question it too closely. That's because strategic debt restructuring shields them from having to declare RCom as a nonperforming asset and take a provisioning hit. Pesky operational creditors like Ericsson AB or foreigners that are owed money such as China Development Bank might think otherwise and play spoiler by getting their bankruptcy petitions against RCom admitted by the insolvency tribunal. But for Indian banks, extend-and-pretend is the best strategy.

All this goes to show that Rajan's halfway house was a bad idea. At the very least, it should have been shuttered once the rehab -- the bankruptcy tribunal -- was ready. Had that been done, banks would be fretting over the missed coupon just as much as bondholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Ericsson's petition to admit RCom into bankruptcy will be heard on Wednesday by the National Company Law Tribunal. China Development Bank may follow suit, REDD Intelligence reported on Monday, citing people it didn't name. 

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net