Industrials

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.

Must the tap of brotherly love turn off at 68 cents on the dollar?

That's where Indian billionaire Anil Ambani's Reliance Communications Ltd.'s 2020 U.S. currency notes currently trade, after a bailout by his older sibling. While that's double where they were in mid-November, when the embattled Indian mobile-services firm defaulted on a coupon payment, creditors are still a long way from being made whole.

Can Bondholders Be Twice Blessed?
A bailout by older sibling Mukesh Ambani's Jio Infocomm has doubled the price of Reliance Communication's 2020 dollar notes, but investors are still far from being made whole
Source: Bloomberg

Instead of being greedy, bondholders should for now be grateful that Mukesh Ambani, India's richest man, is getting his Reliance Jio Infocomm Ltd. to buy some of RCom's operating assets for an undisclosed sum. Analysts expect that amount to be in the ballpark of $3 billion. That still leaves $4 billion of debt to be paid by a company that's shuttered its main business. Filling this gap is a daunting task.

The 58-year-old Anil Ambani, who got control of RCom in 2005 as part of a family settlement with his brother, has claimed that sales of wireless spectrum, towers, fiber-optic networks and related assets as well as real estate, will eventually lead to a zero loan write-off situation. To that end, it's encouraging that China Development Bank, which is RCom's largest foreign creditor, has decided not to press ahead with its bid to push the firm into bankruptcy, according to a Jan. 3 REDD Intelligence report. Indian lenders, meanwhile, are sitting tight as part of a standstill deal.

But bondholders, whose secured notes would be treated on a par with bank loans, can't relax just yet.

As Barclays Capital has noted, based on its estimates of the deal between the Ambani siblings, a recovery of about 53 cents on the dollar is in the bag. The current market price of 68 cents, therefore, shows investors are hoping to recoup another 15 cents from monetization of real-estate assets and any potential equity injection. The timing of those transactions is unclear, though. Besides, the corporate headquarters -- which Ambani is hoping to redevelop -- isn't part of the securities package for bondholders, according to Nomura Holdings Inc.

There are other moving pieces.

White Knight Needed
Nomura estimates that the claims of Reliance Communications' bondholders will be covered up to 45-60 percent by assets in the absence of a strategic equity infusion
Source: Nomura Research estimates

For instance, should some of the bonds remain as a liability of the shrunk-down RCom post the asset sales, exactly how they would be serviced out of pruned cash flows is uncertain. The stump of RCom would have at its disposal the world's largest privately held undersea cable system. But GCX Ltd., the subsidiary that runs the network, has its own $350 million of bonds to worry about. Although GCX's notes are shielded from what happens to the parent, they too are quoted below par -- at 92 cents on the dollar. The remainder of RCom won't have much scope to handle additional debt unless a strategic investor steps in with a big, bold equity infusion.

It would be a fond hope at this stage to think of Mukesh Ambani as that white knight. If he does indeed step into the breach again, bondholders should consider themselves twice blessed.

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

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